If you’ve been thinking about applying for a bank loan but feared that, in the current climate, you’d get turned down, you might reconsider. The reason: At long last, lending seems to be on the rise. In November, it increased 17 percent to the highest level in more than two years, according to the Thomson Reuters/PayNet Small Business Lending Index.
That said, getting a loan or line of credit still is challenging. “We’re seeing some loosening of the screws,” says Ron Walker, president of Next Street Financial, a merchant bank in Boston and New York that works with many small businesses. “But they’re still being pretty conservative.”
The upshot: Approaching banks remains a delicate process, requiring an understanding of what lenders are looking for and just what to emphasize—or not—in your pitch. Here are four key factors banks consider when deciding whether or not to make a loan these days:
The state of your cash flow and collateral. Traditionally, those two factors have been make or break considerations for lenders. “Quite simply, they need to make sure you can cover the debt,” says Walker. But, after the downturn hit in 2008, according to Walker, banks started paying more attention to cash flow and less to collateral. That is, while they required some collateral, those holdings were less important to the mix than the amount of cash flow a business could provide.
Now, according to Walker, the situation has reverted back to the way it used to be—considering collateral according to its full value. The result: Businesses with equipment or other substantial collateral may be in a better position than before.
Whether you really need the amount you’re asking for. Once upon a time, before the downturn, you could request a bit of a cushion. If, say, you needed $500,000 for payroll, you might ask for $750,000 instead. But, despite the fact that they’ve started to loosen the purse strings, bankers are in no mood for such padding. As a result, “Better to ask for the real amount of capital you need,” says Walker. That means proving just why you need a specific sum, without adding in any extras.
In addition, be sure you ask for the right kind of financing. If, say, you need to buy equipment, don’t look for a line of credit, which is more appropriate for short-term needs.
How you handled the storm. If your results were off for 2008 or 2009, it’s not automatically a turn-off, according to Walker, as long as you can show you addressed slowing revenues with smart, effective moves. That means laying out the challenges you faced and what you did to address them, anything from introducing new cost controls to improving margins through a different pricing strategy.
You’ll be in a better position, also, if your results for 2010 were appreciably better than the year before. “They want to see signs of continuous improvement,” says Walker.
A strategic plan. Banks always have required that companies provide financials for the past three years and they still do. Now, however, they also may want a strategic plan for the next three years, identifying opportunities and just what you’re going to do to act on them—how you plan, say, to speed up the sales cycle or increase efficiencies through the use of new software. “They’re looking for the tactics you’re going to use to ensure that any improvements you’ve had aren’t a one time thing,” says Walker. “They want to see what your plan is going forward and how you’re going to execute on it.”
Include lots of numbers to back up your plan. But, at the same time, do so strategically, focusing on the top three steps you’re going to take to grow the company or address problem areas.
By creating a strategic plan—and sticking to it—you’ll also help your chances of getting additional money should you need it later on. That’s especially true if you include clear milestones. “You can say, I told you I’d increase my margins or turn more prospects into sales, and show them you did it,” says Walker.