Greetings!
Each month in this newsletter I strive to provide useful information to business owners and those who provide service to these business owners. This month my article is about what it take to get a bank loan in todays tough environment. |
Looking for a bank loan...Know your 6 C's |
Growing, entrepreneurial and mid-market companies are continually racing for time to complete their business cycle and have enough cash flow to grow...but the battle for time is only won with money. With enough money, you as a business owner, can achieve several year's growth in a shorter time period, but only if you have the money. The problem is... where do you get it?
One answer is . . . the bank.
Banks have always been a provider of capital that entrepreneurs use to grow and expand, but banks are more cautious in these times in making the decision to risk its money in your business. Banks are always evaluating risk when it comes to your performance and business. In order to understand the best way to deal with banks about business loans and how they reach their lending decision, it's useful to understand the 6 C's of Credit. The 6 C's explain the banks evaluation criteria.
1 - CHARACTER Banks will check your business' credit report. They'll look into your past decisions as well as your business results. They'll want to know your personal and professional background, and how well it relates to your financial and business management. Banks will need to get to know you. Remember that they'll look into how you've managed your personal financial affairs as well. This is why it is important to keep your personal credit score high, above 675 at a minimum. 2 - CAPACITY Banks will take a look at your company's past performance and future forecast to determine if you have the capacity to repay the loan within the term requested. Banks will do an analysis of your financial statements, paying particular attention to your past cash flow and your profitability. Here is where the numbers are reviewed from all perspectives and figures are validated. Make sure that they are professionally prepared.
3 - COLLATERAL Banks will protect their money in your business with some type of collateral, and usually it comes down to real estate. They need to know the value of the collateral, and this requires an independent appraisal. Be ready for it.
4 - CAPITAL Banks will want to know if you have risked your own financial resources in the business. They will validate your operations to assess if your capitalization supports the operational needs and debt load. They also look for a safety net to help you handle difficult times or seasonal variations.
5 - CONDITIONS Be aware banks will prepare a clear assessment of the economic conditions, regional markets, industry competition and seasonal variations that might affect the future success of your business. After this, the bank prepares the terms and conditions under which they will grant the loan. Be prepared that one of the conditions will always be a personal guarantee, because their business logic is very simple:
If you're not willing to risk your personal assets, why should the bank put theirs at risk?
6- COMMUNICATION Bankers hate suurprises. It is important to keep your banker appraised of your business results and inform him/her about the good news as well as bad news. The best way to do this is to sit down on a quarterly or monthly basis and discuss your company's financial statements. Having these statements prepared without error in a timely manner and being able to explain them will go a long way in maintaining a good banking relationship.
Your business plan is a comprehensive tool that is prepared for the bank and addresses the 6 C's and other issues that relate to the operatons of your business. Take note, that besides past financial statements, a basic requirement is that you include spreadsheets, forecast & projections, credit reports, tax returns, specific market data, a personal financial statement, a resume of your background, and any other important information to substantiate your loan request. Your business plan must be good enough to support and answer all these questions with ease.
Be prepared for tough questions. Banks want to know:
- How much money do you need and what will it be used for?
- How you will repay the loan?
- What collateral do you have?
- Why not use your own resources?
- Is it a onetime loan, or do you need ongoing credit?
- Do you have an alternate plan? What is it?
It is not easy to do on your own. Looking for professional help is always one of the best ways to deal with this challenge; a professional Part Time CFO can help you prepare your business plan and financial information, often making the difference between success and failure. With our help, you will understand what the bank requires and we will help you provide it.
I have the experience to help you with your bank loan process and business plan, and look forward to working with you to grow your business. |
