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In making loan requests, entrepreneurs tend to be confident that they will meet or exceed what they consider conservative financial projections. They then have trouble understanding when they receive a less than enthusiastic response. To complete the picture, however, we need to look at the process from the banker's perspective.
"What bankers view as a good loan application is at times different from what applicants think," says Ray Fincken, vice president of HSBC Bank USA in New York. "Applicants know the bank needs information about their company to process the loan. So in the first interview they often describe all the good things happening within their company -- focusing mainly on marketing and sales. "
However, bankers are usually more interested in assessing risk and consequently learning that the company has a good core foundation. Does the company have experienced management? Do these managers have various talents and experiences to guide the company through good times and bad?" Given confidence in the management team, the bank must look at the elements of the business plan from a more objective standpoint than the entrepreneur ever can. The critical consideration is whether the company's major products or services provide sufficient profitability and cash flow to meet all its financial obligations, particularly payments to service the debt under consideration.
If the company is a startup, the best indicators are often the norms for the business in which the company will be competing. Are projected margins and ratios in line with others in their industry? The bank will also look at credit reports and tax returns on the key individuals involved in the startup.
If the company has some financial and credit history, the bank will check corporate tax returns and financial statements, individual financial statements, liens, litigation, agency reports such as Dun and Bradstreet, etc. To ensure finances are in order, Ray recommends receiving your personal and business credit reports prior to seeking a loan to make sure the information is correct before going through this process. Misinformation or old loans and liens may erroneously still be on the report. Taking care of these errors prior to applying for a loan can streamline the process.
Fincken says: "We look for consistent, sound cash flow from operations and good, quality assets. We look at these because they are the primary sources of repayment. We then analyze this information and compare it to other similar businesses as a guide." Once the records are in order, the next step is the bank's formal application process. "Planning ahead will help you increase your chances of receiving a loan as well as streamline the loan timeline," Fincken advises. "Put together a business plan and description of why you need financing; include three years of financial statements or projections."
Expect to be asked, and prepare your answers to the following questions:
- How much money is needed?
- What is the purpose of the loan?
- How long do you anticipate using the money?
- How will the company be able to pay back the loan?
- How will the bank get paid if something goes wrong?
Here is a list of the most common reasons for loan denials:
- The company is deemed unable to repay the loan
- There is inadequate financial information
- The financial statements are unprofessionally prepared
- There are perceived critical weaknesses in management
- Applicants fail to demonstrate their ability to implement sound accounting and management information systems.
You would certainly be reluctant to extend credit to a prospective customer where you had significant doubt of their ability to pay. Remember that the bank's business is to lend money, and that they must apply the same discretion to your request.
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