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Inward Investment Guides

SMBs: How to Negotiate the New Lending Maze

While banks have more money than ever on their books, small business owners have difficulty qualifying for loans. The mismatch between lender and borrower results from a more conservative financial environment in which bankers rely on cash flow projections and businesses struggle with an uncertain market.

Phillip M. Perry (Winter 2012)
(page 2 of 2)
Get Ahead of the Curve
Given that a lending bank will likely analyze the historical cash flow of your business, it's smart to be proactive with your own analysis.

"Reach out to your banker right away if you think you are going to run afoul of one of your loan covenants," says Linda Keith, a CPA based in Olympia, Wash., with a niche practice in lender credit training. "Do this before the banker spots the problem. Make it clear that you pay attention and that you have a plan to resolve the issue."

And make sure your bank is aware of how well your business is doing. "If your company has done well during the recession, don't assume the banker knows it," says Keith. "The assumption may be that you are struggling when you are not. Send up the flag and the fireworks. Invite them to come see your business; give them a tour."

You may also run into a related problem: Your recovery from the recession is not yet reflected in your three most recent tax returns - the standard documents perused by bankers.

"Even if revenues have rebounded, business owners may have a hard time convincing bankers who often rely on outdated financial data," says Keith. What to do? "You have to prove in some way that business is up. Bring the good news to your banker in the form of documents such as signed contracts and updated financial statements. You might even provide a trade association article talking about an upturn in your industry."

But just how much leeway does a bank have when getting to "yes"? Regulators, after all, are still very interested in how banks are qualifying borrowers. Even a long-time relationship and great year-to-date financial documents might not support a loan if federal and state regulators won't allow your bank flexibility in terms of consideration of documents beyond the traditional three years of tax returns.

"The regulatory environment is difficult and not always consistent," says Keith. "Yet, a bank with a strong capital ratio and which is not under scrutiny by the FDIC will have more flexibility."

Small Is Good
As the above comments suggest, it's in your interest to assess the financial strength of your primary banking institution. For that matter, have a second bank in your pocket - You may need it when loan renewal time comes around. That second bank may well be a smaller one. "As banks have become bigger in recent years, they have put fewer people on the ground and have become less helpful to business customers," says Marilyn J. Holt, a Seattle-based management consultant. "Many are no longer interested in handling little loans. It's a huge challenge for the small business person."

Not only are smaller banks friendlier to small businesses, but they may well lend when larger banks will not. "Many community banks actually have too many commercial real estate loans and want to rebalance their portfolio by making business loans," says Keith. "They have money to lend if you can demonstrate your business operations will provide adequate cash flow." And don't overlook another source: "Many credit unions are getting into `member business lending, as well" says Keith. "Many are in very good capital positions." And while credit unions are known for smaller loans, they can participate with each other to make larger ones.

Smaller banks and credit unions are less likely than large banks to rely on the automatic credit scoring that can kick out applications from many companies. For those prospective borrowers that don't score high, they may be more likely to sit down with the small business owner and consider all of the financial documents and other factors.

Bonus tip: "Utilize your smaller bank for fee-based services such as payroll processing," says Holt. And let them know how you are supporting them. "When you emphasize to the bank that you are making yourself part of their profit picture, that does help you."

On the Edge
Whatever your funding source, make a good impression by demonstrating a personal understanding of your business finances, advises Keith. "Are you one of the many business owners who are not real strong on the financial side of your business? Seek some continuing education in the topic. Look for workshops at your local community college, or online courses."

And communicate with your banker. "Relationship banking goes both ways," says Keith. "A good banker maintains a relationship with you, but you also need to take the initiative. Get in touch early if something is about to happen that may be perceived as negative."

Being proactive will make you stand out, adds Keith. "Later, when it's time for the banker to go to bat for you with a loan committee, he or she can say that you maintain good business practices and called ahead of time when something was wrong. That can be the difference between `no' and `yes'."
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