It’s fall, which means football season is here! Whether you root for a local high school team or you’re a fan of the NFL®, you must know the rules of the game to enjoy watching. And, no self-respecting football coach goes into the season without a game plan, if he intends to win.
It’s the same with getting a business loan. You need to understand the rules and have a solid game plan for your business to get approval on a commercial loan. So, here are some rules to play by to help you “win” that business loan.
First Down: The first thing you need to understand is that a bank uses its depositors’ money to fund its loans. This means the bank is going to be very careful in choosing companies and individuals who are a good risk and will provide a good return on their investment. Banks typically run a net profit margin of only 1%, so they have to get it right. That’s why banks may seem rather rigid in their lending decisions and why they are heavily regulated by the government. It’s important to show that your company is a safe bet and can continually get 10 yards play after play, all the way down the field for a business loan win.
With that understanding, take a good look at yourself and your business through the bank’s eyes. Do you have a good credit history? A business loan is a lot like a consumer loan. Good credit is a must. No one is entitled to get a loan.
Second Down: Not everyone is an eligible receiver and can catch a forward pass toward a loan. Certain businesses tend to have more risk. For instance, banks will give more scrutiny to a startup because the failure rate is high. Making the jump from being the expert, to owning the business, is one of the biggest challenges of any industry and banks are very careful before they throw a Hail Mary pass.
Misunderstanding this rule could result in loss of yardage.
Don’t Fumble: My advice to small businesses is to manage your growth so you can keep up with your cash flow and avoid dropping the ball on potential problems. Going slowly and working through your issues while you’re still small is a better approach. Then, it’s not catastrophic when you make mistakes.
Many people think it’s easy to become a developer. Sadly, 90% of these would-be developers folded in the most recent down turn. They let the ball drop before scoring because they didn’t have the cash flow to cover the challenges of doing business. These challenges may include: not getting paid, re-dos, insurance, salaries and vendor costs.
Get a Secondary: The next rule of the game to get a business loan is to show proof of a secondary source of cash flow to keep your business afloat, via a co-borrower or guarantor. If you don’t have a co-borrower, another strategy would be to have something you can put up for collateral.
Third Down: Another rule for being a successful business and being eligible to win a commercial loan is to avoid creating a business in a narrow field, making you vulnerable to easy tackles. In the spectrum of industries, the most successful businesses use crowd-pleasing, basic durables such as groceries, shelter, cars, medicine or health as a core business. Keeping away from niche markets will ensure your business’s ability to gain yardage. Banks typically lend to a business that is in an industry with the greatest appeal and audience. Businesses with mass buyer appeal also tend to receive the best terms. Niche companies are higher risk, and will most likely be asked for more money down and receive shorter loan amortization and higher interest rates.
Fourth Down: This is it. You have one more chance to gain the remaining yards. We want a nice clean finish, so be sure to always communicate honestly with your coach (your banker), even if it’s bad news. While some borrowers deem this an obstacle, “winning” borrowers appreciate third-party experts’ review and analysis of their business. Withholding information at this point in the game will only cause a heartbreaking loss. To illustrate the importance of honesty, Bank of Utah suffered minimal loss in the down turn because of its relationships with its business customers. A bank and its customers succeed through good times and bad if they both know the situation and can strategize a game plan together to move the ball forward.
Touchdown! So, you’ve got good credit, have a solid secondary co-borrower a co-signer for the loan, have good collateral, and your business has broad appeal and a good opportunity for growth, and you’ve been straightforward with your bank loan advisor.
When you have a good game plan and play by the rules, you are much more likely score that business loan!