Bank loans continue to be one of the more common ways to finance small business activity. And while some of the uncertainty of the financial crisis continues to linger and with a questionable economy and increased regulation, most banks remain highly conservative with regards to their lending activity. Â However, banks need to lend because that’s how they make money, so it’s not impossible for small business owners to obtain bank financing.
Think banks aren’t lending? The American Bankers Association (ABA) reported in August that banks initiated roughly $1.6 trillion in new lending over the prior 12 months BlackEnterprise.com spoke with Dontá Wilson, BB&T North Alabama Community Banking President and Bob Seiwert, senior vice president of the ABA. Wilson held several key management functions in retail and commercial banking, having spent most of his banking career leading mergers and acquisitions. Seiwert is in charge of the ABA’s Center for Commercial Lending and Business Banking.
Here’s what advice they have to offer:
Find the right bank and the right banker.
Ideally, you want a relationship with a banker at an institution that focuses in on small
and midsized businesses — and ideally, understands your industry. “Most banks will tell you that they do it, but not all specialize in it,†says Seiwert. “You want to find a banker that not only does this stuff, but also has products and services — other than loans — to compliment and meet your businesses financial needs.†He recommends connecting with industry trade groups to find out which banks are doing business within that industry. In addition, the Small Business compiles a list of the top small business lenders by state.
Develop and maintain a relationship with your banker before you need to borrow.
Long before you apply for a loan, you should have been in a relationship and building a relationship with a banker, says Wilson. “That way you have that trust established, so that that banker can really understand your business, spend intimate time, and then so they can help you prepare for that loan application or evaluation that they’re going to take you through,†he says. “In this type of environment we’re in now where relationship is so important, because banks lend to people and businesses. You want to have a relationship with an individual who can look outside of just the numbers since sometimes the numbers don’t tell the full story.â€
Ask the right questions.
Find out from your banker what the bank looks for to qualify a loan. “You got things like certain debt service coverage, like a general number, and having a debt service number of 1.25. Well, how do you calculate that debt services coverage and what does that mean from my income perspective?â€
Other things to determine: what’s your debt worth number? What does that look like? What type of collateral are you going to need from that bank?  “Do that research before you walk in, so that when you walk in, you’re coming in with those things already answered. By understanding it, it helps you prepare a little bit and allows you to go in when the time is right,†says Wilson.
Be able to articulate your firm’s value proposition to its target market.
Why should customers buy from you? What’s your competitive advantage versus other companies? Do you have a
business plan that really makes sense to reach these target markets? “You’re not going to get anywhere with any knowledgeable banker if you can’t articulate this,†says Seiwert. “The banker is going to say, ‘If he can’t sell me, how’s he going to sell anything to anybody else?’â€Â He also suggests developing three plans: one with optimistic revenue and profit projections, one that shows a more likely situation and finally, a worst case scenario. In each case, state how the business will react to the situation. As banks are in the risk business, it will demonstrate you have a plan for mitigating these risks.
Be transparent with your banker.
“You never want to surprise a banker because you may not like his or her reaction. The whole business of banking is built on trust,†says Seiwert. If you’re only going to tell me the good stuff and you’re going to forget all of the bad stuff. If you’re only sending me information when it’s positive, that whole trust factor goes away. He advises finding a banker that you’re comfortable with and develop a relationship where
you can share the good, the bad and the ugly with the banker. He also suggests coming up with a primary and secondary way to repay that loan. This will help the banker become more comfortable with the risk level of extending a loan to your business.
Put some skin in the game.
“If you’re starting up a business and want 100% financing, forget it. How much skin in the game varies by industry, which varies by the assets that you need. So how do you figure that out? Talk to a banker that lends to firms in your industry.†asserts Seiwert. “Don’t ask for a loan that should be funded with an equity injection by the owners. Bankers are not paid to take equity risk. We need to get it repaid because what we’re doing is lending shareholder and depositor money and they all would like it back with some interest.â€