Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
Like the old bank joke says, all you have to do to qualify for a loan is to prove that you don’t need the money. Many entrepreneurs, frustrated by the business loan application process, may suspect that there is some truth to the story. But by better understanding and preparing for the process, business owners can avoid frustration.
The first step is to understand how banks qualify small-business customers for credit. Most banks underwrite small-business loans using credit and financial information on both the business and its owners. Over the past few years, many banks have streamlined their application processes by using credit scoring technology similar to that used by mortgage lenders.
These tools, known as scorecards in the industry, use information from the application as well as business and consumer credit bureaus to calculate a score. The score equates to the probability of default. The most common small-business credit scorecards were developed by Fair, Isaac and Co. (FICO) using pooled information from a number of business lenders.
Depending on the score, the amount of credit requested and the terms, your bank may review additional information. Commonly, banks will request recent tax returns or financial statements on the principals and the company. Bankers use this information to ensure that you and your company have the income and cash flow necessary to handle the proposed debt payments.
If the loan will be secured, the bank may also evaluate the value of the collateral. Banks tend to conservatively discount collateral. For instance, they may not lend more than 50 percent to 75 percent of the book value of inventory and receivables. Banks also look at their current relationship with the company and its owners. A good deposit and loan record with your bank can improve your chances.
The most common reason for loan rejection is poor credit history. Some owners are surprised that their personal credit histories are considered in the loan evaluation. However, FICO and many banking institutions have shown a strong relationship between the credit history of a small business and its owners.
Time in business also knocks out a number of applicants. Many banks require that their applicants demonstrate one to three years of profitable operations before they will be considered. Insufficient collateral is also a common factor in loan denials, particularly on larger requests.
Before applying for credit, small-business owners should honestly assess the strengths of their application. If the owners or the company have had problems with credit, the chances of approval with most banks are low. Other credit obstacles can be overcome by looking at alternatives to conventional business financing.
Many banks offer loans that are guaranteed by the Small Business Administration. While generally not an option in the case of poor credit, SBA-guaranteed loans could often be made to companies that might not otherwise qualify due to collateral deficiencies or cash-flow constraints. Some banks also work with local government agencies or community development groups to make loans in designated development areas.
Entrepreneurs looking to finance start-up businesses can also consider consumer credit options. Home equity loans are a popular source of capital because of their low interest rates and flexible payment options. Many new business owners also make use of personal loans and credit cards.
When asked how much they need, entrepreneurs often respond with, “How much can I get.” It is important to remember that today’s loan is tomorrow’s payment. Business owners need to carefully evaluate their financing needs and conservatively forecast their ability to repay the obligation.
It is a good idea to develop a detailed business plan including financial forecasts before heading to the bank. Income and cash-flow projections should include several scenarios, including a worst case. If any scenario casts doubt on the company’s ability to repay the loan, the principals should reconsider the business proposition.
After evaluating the financing needs of the business and determining the best options, the business owner should shop for the right bank. To develop a successful banking relationship, it is imperative to find a financial institution that can provide the business with the most appropriate products and services for their business needs.
The best advice is to find a bank with a dedicated small-business focus. While branch staff can help with some small-business needs, look for an experienced business banker to answer commercial financing questions. Remember that the relationship with a banker is as important as the bond between customer and lawyer or accountant.
Developing the proper lending relationship takes work. But with the right planning, realistic expectations and a good business banker, small-business owners can find the right financing.
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