Looking to raise capital through a business loan? While lending conditions aren’t as favorable as they were before the recession, banks are slowly becoming more accommodating.
“The banks are very reactionary,” says Mitchell D. Weiss, an author and adjunct professor of finance at the University of Hartford. “When things head downhill, they tighten up really, really quickly. They scrutinize the loans much more carefully, they’re stingier in their credit approvals, they’re tighter with their terms, and they’re higher with their rates. But it has since begun to loosen over the past year or so.”
Of course, easier standards don’t always translate into better deals for businesses in search of funding. So how can you get a loan that’s the right fit for your company, both now and into the future? Read on to find out.
Look to Smaller Banks
The first step to securing a good loan, along with better service, is to avoid big banks, according to Weiss. “I would recommend companies pursue community banks and credit unions. They’ll get a better deal there than they will at the national banks,” he says. “The national banks look for the bigger deals. The credit unions and community banks are wheeling and dealing more these days than the larger banks are.”
Michael Harper, executive director of Top 40 distributor Summit Group (asi/339116), also believes that applying for local bank or credit union loans is a wise choice. “You’re an important customer to them as opposed to you just being part of the cannon fodder,” he says. “If you’re under a million dollars in revenue, a good-sized community bank might work out great for you. If you’re getting loans, you’re probably a lot closer in income to the people on the loan committee, as opposed to just a number at Bank of America.”
Be Wary of Online Lenders
While the Internet has certainly made it easier to obtain a small-business loan, Weiss contends many Web offers are simply too good to be true. “You’ve got all these venture capital and private equity-funded companies that have formed to fill the gap as traditional lenders like banks have become more restrictive,” he says. “The issue with these is the expense associated with them.”
Even smaller loans that only tend to be outstanding for a few months can be costly. “If you look at the combination of fees and interest and calculate the annual percentage rate for those loans – when you annualize the rates that are actually being paid, you’ll find that they are really expensive,” Weiss says. Be wary of the terms and requirements of any business loan you consider.
The trap, according to Weiss, is that many borrowers often come back to these types of lenders for more money. “Just like with payday loans for consumers, the likelihood is that these loans are going to be taken out all over again,” he says. “So while there are those that dismiss applying an annual percentage rate to these loans, by the time you’ve taken them out over and over again, you have them out for the whole year. You need to take a look at what these things cost on an annual basis, and then make a decision on whether it’s worthwhile.”
Be Upfront With Financials
Whether you’re going with a big bank, credit union or online lender, the central piece to any loan application is a detailed business plan. Here, Harper says being honest about your company’s financial history and projected future is crucial, both to the lender and the business owner.
“I would think three years of expenses is a good trend,” he says. “If you can show earnings growth and that you’ve managed your expenses and kept them in line, you’ll give bankers comfort.”
Loan officers, Harper says, want potential borrowers to show good command of their business figures. To get the best look, operating costs and sales retention should be consistent, and companies should have some cash in reserve. “You’ve got to show that you understand the idea of running a business,” Harper says. “Being very straightforward and very transparent – I think anybody, as well as bankers, will appreciate that.”
Business owners should also recognize the importance of presenting sensible financial projections. A trumped-up projection might lead to a loan that a company can’t repay on time. “This is not the place to be optimistic,” Weiss says. “This is the place to be realistic. You’re going to be signing for this personally, and if you put down that you think your sales are going to be $100,000 for the year, and they turn into $30,000, you’ve got a problem.”
Consider Multiple Projections
If putting together an accurate business outlook seems a bit challenging, Weiss advises looking to the past. “If your business has grown by 20% each year for the last three years, and if it’s reasonable to expect that your business can continue to grow at 10% to 20% going forward, you’re going to build your business plan that way,” he says.
If you’re more detail-oriented and want to present forecast options, Weiss recommends conducting a probability analysis that includes multiple projections. “For example, there are three plans that I’ll generate: I am 100% sure that my business will be at least as good next year as it is this year, with no growth; I am 75% sure that I can grow my business by 10% next year; and I am 50% sure that I can grow my business by 20% next year,” Weiss says.
This analysis can help everyone involved in the loan process reduce risk and come up with a loan amount that makes sense. “It’s not so much that you underestimate – you realistically estimate,” Weiss says. “What do you really think is going to happen? You’re going to be borrowing money that you want to know you can pay back.”
Make Terms Work for You
When it comes to making customers happy the old adage is: under-promise and over-deliver. Harper says that same kind of attitude is useful in drawing up realistic loan repayment terms, as well.
“I would try to get the longest terms possible and make sure you have the flexibility to pay it back as quickly as possible,” he says. “If you’re on a term loan, definitely try to get five to seven years. If you can pay it back in three, then you look like a hero.”
Harper believes business owners should also make sure they have the option to pay their loan off early without incurring fees, especially when taking out a loan for property like an office building. “I would absolutely try to make sure that you get loans that don’t have any prepayment penalties,” he says. “We had to negotiate on a mortgage we had on one of our buildings with the bank, and they originally would not let us pay off more than $50,000 once a year against the principal. We negotiated that – not that we had to, but it at least gave us the option.