by Leon J. Owens
Your bank is a lender, not an investor. They don’t want to own any part of your business; they just want their money back with interest.
Before any bank will provide a loan, they need to understand the risks you and your enterprise pose as a borrower. Your job is to give them credible assurance that they’ll be getting their money back…with interest. How do you do that?
Start by understanding your financial needs in pursuit of your business objectives by asking yourself six simple questions:
- Do I need cash to buy fixed assets that will generate revenue?
- Do I need cash to fill the gap between payables and receipts?
- Are my needs short term? Can I repay the loan within the business cycle?
- Are my needs long term? Can I repay over time on a structured schedule?
- Am I in danger of using a long term loan to cover a short term deficiency?
- Am I risking working capital by using short term cash for long term needs?
When you can answer those questions, you’re ready to talk to your bank. But first, understand that the bank will be focused on their credit risk on four levels:
- Your credit risk
- The business liquidity risk
- Current and future interest rate risk
- Economic risk
To get your loan, you and the bank will need to understand how you’re going to share those risk elements. Once the bank understands the risk in making the loan, they’ll deal with the liquidity, interest rate and economic risks. YOU need to minimize the credit risk to the bank, convincing them of your ability to repay the loan.
You may be confident that you can present a worthwhile credit risk profile, but before you walk into the bank, check these…
“Five C’s of Credit”
- Character – Do you have a history of repaying loans on a timely, agreed-upon basis? Are you a person of integrity with a proven ability to conduct your business in good times and bad?
- Capacity – Can your business realistically repay a loan? Can you provide financial statements and realistic projections that indicate that ability?
- Capital – Does your business have sufficient equity to protect the bank from a loan loss? Can you show the bank access to additional funding to mitigate their risk?
- Collateral – What if the business fails? Does the business have assets that can be converted to cash to repay the loan?
- Condition – What’s the current business/economic environment? Is your market sector strong and growing, or weak and struggling? (It’s really hard to get a bank loan for your “buggy whip” enterprise.)
If you fit those fundamental criteria, you’re ready to apply for your loan. Be sure that you and your business fit the bank’s lending profile and then apply those “Five C’s of Credit” to your application:
- Tell the bank how the money will be used and how you’ll repay the loan.
- Present historic and projected financials, with a realistic cash flow picture.
- Describe your business background and that of key management personnel.
- Show your plan to deal with your competition and any marketplace changes.
Your bank wants to loan you their money…if you’re a good risk. Convince them that you are, and you’ll soon have your loan.
If you need someone to help you through the lending process, I’m here to help. Just give me a call and we’ll talk about your plans and your business needs.