(This post originally appeared on Philly.com)
If you think it may be a good time to get a loan from your bank, you’re probably right. Interest rates are still pretty low, the economy is strong, and bank profits are up.
This is why loan approval rates for small businesses are increasing. In fact, according to the Small Business Lending Index, a monthly barometer published by financing firm Biz2Credit, small-business loan approvals reached their highest level of all time in April.
Almost 28 percent of loan applications submitted by small companies and received by big banks with more than $10 billion assets were given the green light. Small bank lending approval rates reached close to 50 percent.
“The economy is still strong, and small-business optimism is high,” said Biz2Credit CEO Rohit Arora, who oversees the monthly research derived from more than 1,000 small-business credit applications on his company’s online lending platform. “Small-business lending is as strong as it has ever been in the 21st century’s post-recession era.”
Capacity
Collateral
Next, you have to take a hard look at your collateral. Bankers want protection and, unless you’re running a big corporation and have a long history of strong financial performance, the fact is that they’re going to demand collateral. Most of that time that means a personal guarantee. It will also mean pledging such assets as accounts receivables, inventory, cash, equipment, property and real estate. The more assets you’re willing to pledge, the better chance you’ll have of getting a loan.
Don’t believe me? Just ask Paul Ahlers, the president and owner of Triactive Media, a business consulting and technology company based in Mount Laurel. Ahlers considers his company financially healthy. Last year, for example, he generated more than $1 million in sales and cleared about $200,000 in profit.
Even so, “we still don’t see ourselves being able to get a loan without some sort of personal guarantee,” he told me. This hurdle has forced Ahlers to build his business without the aid of any bank financing.
Capital
Capital is very important. A banker will look at your balance sheet to determine how your assets compare to your liabilities. If you’ve got a significant excess of assets, that’s a good thing.
Some rules of thumb: Are your current assets (receivables, cash) at least more than one-and-a-half or twice your current payables? Does your existing equity (total assets less liabilities) significantly exceed any other debt you have outstanding?
These are critical metrics that every banker will look at when evaluating a new loan, which is why, according to JPMorgan Chase’s Donovan, “the business owner should count on their banker to discuss the liquidity and leverage position and get their feedback on how the business falls within or doesn’t meet the bank’s financial guidelines in these areas.”
Conditions
Lenders also look closely at conditions. Oftentimes, these factors are out of your control. They include such things as the economy, industry trends, and pending legislation or political circumstances.
To win a bank loan, you’ll need to explain why your business is poised to grow, how the economic environment will impact you, why your industry is strong, and how you’ll be meeting the challenges of any potential legislation or political action that may be on the horizon. That means doing some economic research, perhaps investing in a few market analyses, and creating a business plan that shows how your company will continue to succeed in the years to come.
Character
Finally, there’s character. Since the dawn of modern commerce, people like to do business with people they trust. Every good banker I know takes a hard look at the person they’re lending money to in order to determine if that person is hard-working, honest, and true to his or her word. Can you demonstrate your personal integrity? Do you have strong references from other business associations and members of your community? Is your credit history sound? Are you confident in your reputation? All of these factors will determine whether or not a lender would want to be in business with you.
Meeting the “5 C’s” isn’t something that’s going to happen overnight. It takes time to build up a financial history. It also takes time to put together your business plan that demonstrates all of the above. Most bankers I know say that business owners – particularly first-time borrowers – should be laying the groundwork for their financing pitch months, even years, in advance.
It takes a lot of effort to get a traditional bank loan, even in these times of higher-than-usual approval rates. Which is why you might decide – like Ahlers – to just spend your resources elsewhere.
“Unless you are financing to buy equipment (for example, a pizza shop),” he says. “The energy and risk spent to get a bank loan may be better put toward servicing customers and building the business organically.”
