What Your Banker Thinks When You Want to Start a Business

What Your Banker Thinks When You Want to Start a Business – Carl Vonderau.

You’ve got this great idea, or you need to expand your small business to the next level. All you want is some financing to seed your growth. So you go into talk to your boring banker. She loves the idea, but what is she really thinking? She will need all kinds of information, which includes: business financial statements, tax statements, and bank statements. So what does she have to prove to her bank to get the loan approved?

• Who are you and what is your history and reputation? Banks are legally required to know their customers, but it goes beyond this. You are way ahead if you’ve founded successful businesses before. She also has to represent that you are honest and cooperative. There are all kinds of “Know Your Customer” rules now. If you’ve been bankrupt, or have been accused of screwing your bankers before, you have a tough mountain to climb. Beware that, with the internet and private data bases, most of your history is easily found.
• What is your business concept and does it have a track record? If this is a new product and you have never sold it before, you will have a hard time getting a loan. If you have a history of sales and you want to increase capacity with quantifiable success, you’ve got a good case. Or if you simply want to replace one bank with another because you like the products of the new bank, that ‘s catnip for your prospective banker.
• The industry. The bank will evaluate your business’s industry, local market trends, and overall economic conditions. Is your business in an industry and an area that has demonstrated or is forecast to show a lot of growth? Some industries, like restaurants and startups, are notoriously risky and banks stay away from them or require stricter lending conditions. If you are in a strip mall, is it full of customers or do all the stores have Sale signs and the parking lot is full of potholes? Is there a well-known large store to draw in customers?
• What is the cash flow of the business? If you are a start-up, the banker will look at your personal cash flow. Do you have enough funds coming in to support both your family and your business? If you have an established business, what are the required sales and net income to support the loan? Established businesses get more preference.
• Another source of income to pay this loan plus all your other debt. Banks want two sources of income. This could be the business plus the other income that you and your spouse earn. This includes looking at your personal credit score and your business credit score.
• Government support. Will the Small Business Administration back the loan? If so, the bank can offset much of the risk of lending money to you. The SBA will guarantee a portion of the loan.
• Can you pledge something to the bank. It could be property, inventory, or receivables. But banks prefer receivables. These are invoices for actual sales rather than agreements or proformas. The risk then is not you but your customers. They are the ones that will pay you the money to re-pay the bank. Another source of collateral might be a building or house that does not have much debt.
• Personal guarantees. Perhaps your business is iffy, but you own a building without much debt. Maybe the bank will accept a personal guarantee for your business loan. For instance, Donald Trump has billions of dollars of personal guarantees. However, many banks think they are not worth much unless they are collateralized with something.
• Business plan. Bankers love clear, well organized business plans. These must include a market analysis, growth plans, revenue projections and the management background. They will also include expansive detail on the purpose of the loan. Lots of numbers. Bankers love business plans they can copy and paste into their loan proposals.

 

 

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