By Cari Fullerton
It's late in the fall and football season is winding down. Whether you root for a local high school team or you’re a fan of the NFL, you must know the rules of the game to enjoy watching. And no self-respecting football coach goes into the season without a game plan if he intends to win.
It’s the same with getting a business loan. You need to understand the rules and have a solid game plan for your business to get approval on a commercial loan. So, here are some rules to play by to help you “win” that business loan.
First Down: The first thing you need to understand is that a bank uses its depositors’ money to fund its loans. This means the bank is going to be very careful in choosing companies and individuals who are a good risk and will provide a good return on their investment. Banks typically run on a net profit margin of only 1 percent, so they have to get it right. That’s why banks may seem rather rigid in their lending decisions and why they are heavily regulated by the government. It’s important to show that your company is a safe bet and can continually get 10 yards play after play, all the way down the field for a business loan win.
With that understanding, take a good look at yourself and your business through the bank’s eyes. Do you have a good credit history? Do you understand how your company makes money? Do you have a good understanding of how the loan will add more value to your company? A business loan is a lot like a consumer loan. Good credit is a must. No one is entitled to get a loan.
Second Down: Not everyone is an eligible receiver and can catch a forward pass toward a loan. Certain businesses tend to have more risk. For instance, banks will give more scrutiny to a startup because the failure rate is high. If your business is a startup, be sure to have a sound written business plan. This will not only help you understand all the factors in operating a new business, it will help the bank gain insights into how you will operate the company. An experienced banker can be an excellent asset to you in the startup phase. Making the jump from being the expert to owning the business is one of the biggest challenges of any industry and banks are very careful before they throw a “Hail Mary” pass. Misunderstanding this rule could result in loss of yardage.
Don’t Fumble: My advice to small businesses is to manage your growth so you can keep up with your cash flow and avoid dropping the ball on potential problems. Many businesspeople do not realize the amount of cash it takes to grow the business. Therefore, it is smart to complete pro-forma cash flows for the current and following year of business. Going slowly and working through your issues while you’re still small is a better approach. Then, it’s not catastrophic when you make mistakes.
Many people think it’s easy to become a developer. Sadly, 90 percent of these would-be developers folded in the most recent downturn. They let the ball drop before scoring because they didn’t have the cash flow to cover the challenges of doing business. These challenges may include not getting paid, re-dos, insurance, salaries and vendor costs.
Get a Secondary: The next rule of the game to get a business loan is to show proof of a secondary source of cash flow to keep your business afloat — via income from investments, annuities or a co-borrower or guarantor. If you don’t have a co-borrower, another strategy would be to have something you can put up for collateral. The bank wants you to succeed as much as you do and will work with you to ensure that if the company does struggle, you have the means to pay your debts.
Third Down: Another rule for being a successful business and being eligible to win a commercial loan is to avoid creating a business in a narrow field, making you vulnerable to easy tackles. In the spectrum of industries, the most successful businesses use crowd-pleasing, basic durables such as groceries, shelter, cars, medicine or health as a core business. Keeping away from niche markets will ensure your business’ ability to gain yardage. Banks typically lend to a business that is in an industry with the greatest appeal and audience. Businesses with mass buyer appeal also tend to receive the best terms. Niche companies are higher risk, and will most likely be asked for more money down and receive shorter loan amortization and higher interest rates.
Fourth Down: This is it. You have one more chance to gain the remaining yards. We want a nice, clean finish, so be sure to always communicate honestly with your coach (your banker), even if it’s bad news. While some borrowers deem this an obstacle, “winning” borrowers appreciate third-party experts’ review and analysis of their business. Withholding information at this point in the game will only cause a heartbreaking loss. To illustrate the importance of honesty, banks with honest relationships with their clients suffered minimal loss in the down- turn. A bank and its customers succeed through good times and bad if they both know the situation and can strategize a game plan together to move the ball forward.
Touchdown! So, you’ve got good credit, have a solid secondary source of income for the loan, have good collateral, and your business has broad appeal and a good opportunity for growth and you’ve been straightforward with your bank loan advisor.
Post-Game Analysis: The real value that a seasoned commercial loan officer can add to your business, besides giving you the loan, is experience. Over the years, they have accumulated knowledge that has helped businesses grow, survive and work their way out of difficult situations. Using the loan officer as an advisor will be one of the most valuable assets available to keep your business scoring touchdowns and advancing the ball.
When you have a good game plan and play by the rules, you are much more likely score that business loan.
Cari Fullerton is a senior lender and team leader for commercial real estate at Bank of Utah.