How to speed path to
getting first bank loan

business builder banking

Funding a small business can be tricky. You may consider tapping into your personal resources: borrowing from family and friends, selling pieces to investors, or putting it on your credit card.

Before you clean out your 401(k), sell investors the lion’s share of your company, or put another pound of flesh on the plastic, it may be wise get the financing you need to achieve faster growth by taking out a bank loan or line of credit — especially with interest rates near historic lows.

Qualifying for bank financing shouldn’t be difficult. After all, it’s a “meets minimum” proposition. Banks aren’t investors. They don’t share in the upside. So you don’t have to prove to them that your business is going to be the next Wal-Mart.

All you have to demonstrate to bankers is that they won’t be sharing in any downside. If you can prove to a bank that, come success or failure, the loan will be repaid either from your revenue stream, your personal resources or your collateral, then you’ve as good as got your funding.

Unfortunately, small-business owners do not always qualify for a bank loan. “My gut feel is that probably well over 50 percent of first-time bank loan applicants are turned down,” says David Vang, finance department chair, College of Business at the University of St. Thomas in St. Paul and co-author of “Entrepreneurial Finance: An Applied Approach.”

The loan approval rate differs dramatically among banks because the degree of interest in certain types of small-business customers varies. “Search out the right bank,” Vang says.

Larger banks without a focus on small business might not want to go after start-up loans, Vang says. Given the costs of monitoring and servicing such loans, they may see them as not being cost-effective.

Bankers may be more open to these loans, Vang says, if your business will be creating employment in their neighborhood, thereby increasing the economic soundness of all the loans in their portfolios.

Vang advises entrepreneurs to shop for the right bank. Begin by consulting with the small-business operations at local colleges and universities, such as the Center for Entrepreneurship on the Minneapolis campus of St. Thomas. He also suggests you visit bank Web sites to determine which types of customers they focus on and then set a “get-to-know-you” appointment with a banker.

Once inside the bank’s door, too many entrepreneurs present a business plan that needs more work. “Owners of start-ups are usually better at forecasting revenues than they are at anticipating the size and timing of expenses,” says Mark Kuhne, vice president of commercial lending at Highland Bank. “We’ll play out some what-if scenarios with them: What if costs are larger than projected? What if revenues are delayed by three months? How will you deal with the cash-flow implications of that?”

Additionally, both Vang and Kuhne cite a lack of acceptable collateral as a common weakness among bank loan applicants. When it comes to collateral, large, not-easily-moved equipment is best.

Accounts receivable and inventory, while suitable, aren’t as attractive as collateral because in a liquidation situation, a bank may find itself holding receivables that can’t be collected or merchandise that can’t be sold.

Favorable signs

Banks prefer to make first-time loans to businesses that can document two or three years of accelerating growth in sales and profits. But don’t be discouraged; bank loans are well within reach of start-ups that do not have such well-established, favorable financials.

First, having another source of adequate household income can help secure that first bank loan because it assures that the business owner won’t be relying on the start-up to cover living expenses.

Also, banks are favorably impressed by entrepreneurs who have orders-in-hand from customers who have signed either contracts or letters-of-intent to buy their products as soon as they are built.

In addition, experience can go a long way with bankers. It helps if the company’s owner and managers have worked in the industry for years. And if the start-up has partners or board members who are well connected in the field, then bankers know that the entrepreneur is getting good advice.

“A lack of sufficient customers or assets,” Vang says, “can be partially offset by surrounding yourself with reputable, experienced people.”

To prepare for the loan application process, Vang suggests entrepreneurs review the information required by the U.S. Small Business Administration. “Those SBA forms can be used as a template so you can learn what the bank will be looking for,” he says. “That way you won’t blindly come into the bank saying, ‘I’ve never done this before. Here’s my proposal. I hope it’s good enough.’”

Jedd Birkholz is president of Builders Direct Inc., a building materials supplier founded in 2002 with two employees located in Loretto. He received financing from Highland last December.

To become a bankable risk sooner rather than later, Birkholz advises his fellow entrepreneurs to put their egos on hold and their companies on a slower growth curve.

“For the first few years, you’ve got to live like a pauper,” he says. “That may mean paying yourself as little as possible and giving yourself as few perks as possible. Banks are unwilling to give you money if your profits are disappearing into your lifestyle.

“Also slow, steady growth is important,” Birkholz says. “If you have a boom, it’s tough to secure the funds from the bank quickly enough because you don’t have a long enough track record making payments. With a slower growth rate the bank is able to grow with you.”

While waiting for the proceeds of a bank loan, Vang and Kuhne encourage businesses to seek cash-flow assistance from their suppliers and customers. Vendors may grant their clients trade credits that allow the clients to defer paying for shipments until after the clients have been paid by their customers.

Also, in exchange for a lower price, a business may find customers willing to pay some portion of the purchase amount when the order is placed, with the balance due upon delivery. “If you can make these arrangements with your vendors and customers,” Kuhne says, “you’re in great shape.”

[contact] Rick Wall is CEO of St. Paul-based Highland Bank, with eight Minnesota locations and $390 million in assets: 651.690.8209; ri*******@***********ks.com; www.highlandbanks.com