Getting on the good side of your loan officer.
There has been ample speculation about a slowing national economy in the next year or so and some economists are even starting to whisper the “R word.”
While moving into a recession is still speculative at best right now, it is prudent for business owners to understand how the credit environment may change in a slowing economic cycle. I would like to provide a refresher on the strategies for businesses seeking a loan in a tightening market.
Quick note: The basics of applying for a loan should remain constant in any environment, including factors like capacity, capital, collateral and conditions used by lenders to gauge the creditworthiness of potential borrowers. This column provides some of the more nuanced strategies for businesses who may be facing a stricter lending environment in the coming year.
Be a good communicator to your banker
Meet several times with your loan officer and convey your expertise, competence, plan and passion. Share the good, the bad and the ugly. Being able to accurately and efficiently convey the important aspects of your business goes a long way to helping the banker truly understand your business and your request.
Make your business plan bulletproof
One walks into a loan meeting with two incredibly important items: your business plan and knowledge of your business. During your loan presentation, the bank wants to understand what you do, what your needs are and how they might be able to help you within the framework of meeting the bank’s risk appetite. Be ready to nail this and to answer any and all questions from lenders.
Understand your business plan, the key risks and how to mitigate those risks. The critical things to include in your loan presentation are your plans for the business, how much you want to borrow and how you plan to repay the bank. Further, demonstrate that you have thought of every eventuality and have a strategy to handle any challenge.
Know more about the process than you do now
This leads into another key tip for securing a loan when credit is tight. Be knowledgeable about the process from the lender’s side. The bank will review historical financial performance and compare your business to similar businesses. To do this, the bank may look at the Risk Management Association's Annual Statement Studies. It contains more than 360 industries and can tell you what your banker expects to see on your financial statement or plan.
For example, one key metric a bank considers in approving a business loan is its ability to repay the debt out of cash flow. Be prepared to provide context on the trends of your six cash flow drivers (revenues, cost of goods sold, operating expenses, accounts receivable days, inventory days and accounts payable days).
Also, consider your businesses current liquidity and leverage ratios as these are key metrics bankers use when considering a new request.
Be first to talk about the worst case scenario
It may sound counterintuitive, but detailing potential problems and how you have planned to meet those challenges is important. This shows that you are aware of the key risk to your business and have a plan in place to mitigate the risk.
Be persistent and open to counsel
Lenders want to lend, but there are of course circumstances when a loan is denied. If that happens to you, don’t just fixate on the no answer. Talk to the banker and really listen to what they say about your request. You should be able to walk away from a no conversation with a plan and understanding of what it really means – “not now, but here is how.”
In some circumstances there could be easy fixes, like correcting an error in your credit report or paying off other debt. If you feel a no answer is not justified, be persistent. A no answer from one bank may not necessarily mean a no answer from another bank. Small business owners are persistent by nature and this should extend to the loan process.
The past few years have been a particularly good time for businesses to secure a loan. If the economy slows in 2019 however, that could change. It is critical that when seeking a loan in a tighter credit market, you consider the details and nuances of obtaining the credit you need.
Brian Thomas is vice president, commercial relationship manager for Columbia Bank