How to get a 'yes' from your banker - commercial loan advice

Nation's Business, April, 1996 by J. Tol. Jr. Broome

To get your loan approved, arm yourself with answers to the most common objections.

Proper preparation often determines whether your bank gives you a "yes" or a "no" answer when you apply for a loan. And one of the best ways to prepare is to be ready to answer objections. Here are the five reasons most commonly cited by bankers when they reject a loan, followed by some suggestions for ways to respond to each reason for denial.

1. I don't know enough about you or your business.

There are a couple of key steps you can take to ensure that the loan officer is properly informed.

First, put together a business plan, even if your company isn't a start,up. "The existence of a business plan will help convince the banker that you have credibility as an owner," says Debbie Dixon, a vice president and manager for small-business loans with Citibank in New York City.

Bankers look for quality, not quantity, in a business plan. "The business plan may only be a few pages," says Dixon. "The key is that it be well thought out."

Second, be prepared to supply business credit references and your personal credit history. Dixon says that the owner's track record in repaying past business and personal obligations in a timely manner is vital in the consideration of a request for a small-business loan.

2. You haven't clearly stated why you need the money.

When a banker asks "How much would you like to borrow?" don't reply with "How much will you lend me?"

Before you go to the bank, perform an indepth analysis of your borrowing needs, and take the information with you when you go to apply for a loan.

3. Your numbers don't support the loan request.

If your business has been only marginally profitable or even losing money, there's still hope. But it won't be easy. Bankers are trained to make loan decisions based primarily on a company's ability to generate sufficient cash flow through consistent profitability.

The key is to accentuate the positive. If you have been in business for five years and have lost money only in the past year or so, emphasize your success during the first four years and why you believe your profit problems are only temporary.

"If you have lost money, you need to know the reason for the loss," explains Cal Cleveringa, a vice president and smallbusiness-loan officer with American State Bank, in Sioux Center, Iowa. "The downturn may be caused by the economy, health, or labor problems. We want to know what changes the owner will make to fix the problem."

Dixon agrees that one or two loss years will not automatically lead to a denial of the loan request. "It's quite common for small businesses to lose money," she says. "There are oftentimes good reasons for a loss, such as in Florida with Hurricane Andrew.

"We will try to look for other attributes," Dixon continues, "Like the existence of a business plan, the leverage ratios, and whether the company is growing or at least not shrinking."

4. You don't have enough collateral.

Small-business owners complain that lenders lack an adequate understanding of the market value of assets such as machinery and inventory. And they are right. Bankers aren't experts on most of the collateral against which they lend.

Don't expect the bank to lend dollar for dollar against the collateral given, no matter what is being pledged. Banks have certain guidelines they follow in setting loanto-collateral value ratios.

For example, banks generally lend no more than 80 to 90 percent of the value of a vehicle or real estate, 70 to 80 percent of a company's machinery and equipment and of accounts receivable, and 40 to 60 percent of inventory.

You may have personal assets such as debt-free automobiles, bank certificates of deposit, stocks, or real estate that could be used to secure the loan. "We often look outside the business to personal assets for collateral," says Cleveringa.

5. Your business does not support the loan on its own.

Most banks won't lend to any small business without personal guarantees from the owner or owners. The purpose of a guarantee is to provide a secondary repayment source for the loan in case the small business is unable to pay.

"As a matter of policy, we always ask for the personal guarantee of the owner/says Dixon. "We look at the small-business owner and the small business as being one and the same." Offering a personal guarantee upfront demonstrates a full commitment to your venture that will enhance your chances for loan approval.

Applying for a small-business loan can be a headache. However, if you are prepared to answer these common objections from bankers, you will improve the chances of obtaining the financing you need.

"We are looking to bet on the survivability and cash flow of a small business," says Dixon. "Good preparation by the business owner will help establish the credibility necessary to convince the banker that the business and the owner have what it takes to be survivors."

J. Tol Broome Jr. is a loan administrator for FirstSouth Bank in Burlington, N.C.