Despite recent moves by the Obama administration to loosen bank lending to small businesses, it still can be tricky to get a loan. But, it's not impossible, especially for firms with a healthy balance sheet.
“If the owner has a strong credit history, the company has been in business for a number of years and revenues and profits are on the rise, you can get a loan or a credit line,” says Ken Gaebler, principal of Walker Sands, a Chicago-based marketing and web design company that just received a $75,000 line of credit.
Yet, you’ll have to jump through at least a few hoops before you get approved.
Here’s what you need to know to make sure you land on your feet.
Approach small banks. Although several big financial institutions recently increased their small-business lending, your chances of getting a loan are still better at a community bank. In 2009, small companies that applied to small banks for loans were three times as likely to get credit as those who applied to large banks, according to a study by Barlow Research Associates.
The odds that you’ll find a loan officer willing to look past strict formulas are also better. “We do understand it’s been a very trying 12 to 18 months,” says Frank Sorrentino, president of North Jersey Community Bank in Englewood Cliffs. He points to a 45-year-old manufacturing company that recently asked for a line of credit after experiencing its first unprofitable year in its history. Turned down by several large banks, the company owners shared their financial records with Sorrentino, revealing everything from orders for future business to plans to cut expenses. The bank gave them a loan.
Get all your financial records in order. That experience underscores another key point: Assume the banker will want to see as many documents as possible, and then some. That should include three years of tax returns, a personal financial statement with information about your net worth, accounts receivables, projections for revenues and earnings, and even client testimonials. “Be proactive,” says Sorrentino. “Don’t make the bank drag it out of you.”
Of course, you’ll also be in a better position if you can provide adequate collateral. Sorrentino pointed to the owner of a diner who couldn’t get financing. But, after reviewing all the individual’s holdings -- including his personal home, the diner and the land the diner was on -- Sorrentino agreed to provide a loan.
Be realistic. When asking for a loan from a bank, don’t be tempted to start with a too-high number, figuring you’ll negotiate down. You’re dealing with a highly conservative institution, so it’s best to ask for what you really need. “We’re looking for the number you can afford to pay back, not the number you want,” says Sorrentino. “If your cash flow can support $200,000 and you’re asking for $800,000, you’re going to get $200,000.”
In fact, chances are good the bank won’t give you everything you ask for. Forty percent of small business owners attempting to borrow last year got their full request, according to the National Federation of Independent Business, while 21 percent had some of their needs met. That’s compared to the mid-2000s when up to 90 percent had all of their most recent credit request approved.
What’s more, if it’s a place you haven’t borrowed from before, start small. It’s best to build up a track record and try for something bigger next time.
Offer to give them more of your business. If you don’t already have, for example, a checking or savings account with the bank, make it clear you intend to set one up pronto. “We turn down a lot of people who don’t want to take advantage of all the products and services we offer,” says Sorrentino. “The vast majority of community banks want to develop a larger relationship with clients.”
If you’re turned down, don’t give up. That’s especially true if you have a top-notch credit rating and positive cash flow. Consider reviewing your case with a loan specialist at a small business development center. Then, try to arrange another meeting with the bank’s loan officer, just to discuss why you didn’t qualify. Your goal is to pinpoint the problem, so you can figure out what to do about it. You might, for example, discover you need to change the way you manage cash flow. Or, it could be you simply aren’t profitable enough. Then again, you might need to find a bank with more experience lending to your industry.
Bottom line: Keep trying!