If you haven't applied for a bank loan lately you might be surprised by the process and the outcome. A slowdown in the economy, weakness in the real estate market and increased uncertainty about the future could make it more difficult to obtain the financing you need to fund or expand your business. These are some of the reasons why finance based websites like lovemoney.com have become very helpful nowadays. Understanding what your banker needs from you to approve your loan request and how your banker evaluates your creditworthiness can be the difference between approval and rejection. "It's important to have timely financial information and a detailed, easy to understand request for why you need a loan," says June Webre, Regional President for Team Capital Bank.
The 5 C's of Lending
Lenders typically look at the so-called 5 C's of credit when evaluating loan requests. Those C's represent character, cash flow, collateral, capital, and conditions. While financial considerations are very important, lenders look at your character when considering a loan request. Your track record for honesty and integrity, experience and expertise in your industry are critical components of how a banker evaluates your character. Lenders are more likely to make a loan if you can demonstrate success in your business and industry.
Financial Considerations
A bank will want to understand why you need the funding and what you plan to do with it. This may include you having to educate your banker on your company and industry. The more information you provide your lender, the more comfortable your banker will feel. Your banker will evaluate your balance sheet, cash flow, sales and other important performance metrics of your industry. They will also evaluate the value of any collateral available to secure the loan. Your banker wants to understand how your company will generate adequate cash flow to repay the loan with interest on time. Are your company's cash flow projections realistic? Banks typically have minimum policy guidelines for the debt service coverage ratio that they will accept.
Collateral is generally receivables, inventory, machinery and equipment and real estate - pledged to the lender as protection in the event of a default. For businesses in the service sector, or those without machinery and equipment, the whole subject of collateral can be complicated. Personal guarantees by the business owner(s) and principals are also required. Term life insurance payable to the lender for the face value of the loan may also serve as collateral.
Is your firm well capitalized or thinly capitalized? Are you leaving money in the business to fuel growth, or do you distribute it? Is your firm financially strong, capable of weathering a storm? Your capital structure will demonstrate overall strength and help a bank understand what kind of financial stress your organization can take. This, in addition to economic and industry conditions, will factor into a credit decision.
Know thyself, know thy banker
Certainly applicants should present quality information to the lender when making a credit request: business and industry overview, financial plan, projections and analysis. Having a good relationship with your banker can be the difference between success and failure. Remember, when your banker extends credit to you, s/he is making a commitment to your company. You need to get your banker on your team. "A banker who understands your company, its needs and goals, is an important business partner," adds Webre. Contrary to the story that bankers will lend you an umbrella only when the sun is shining, all bankers are in business to make loans. The best bankers will work hard to make your experience successful because it will bring them future business and contribute to the economic health of the community - a winning solution for everyone.
June M. Webre is Regional President for Team Capital Bank, Lehigh Valley. Reach her at
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or 610-297-4040.
