Getting a commercial loan – Understanding the Banker’s Perspective
Getting a commercial loan is one of the biggest steps that a business can take. New entrepreneurs often find it difficult to determine exactly what bankers expect from them. Because the commercial banking market is highly competitive, bankers are generally reluctant to directly instruct borrowers on how to be ideal clients, as it may come across as patronizing. This means that most borrowers learn what is expected of them through repeated requests from bankers and accumulated experience. Consequently, many commercial loan customers do not fully understand what their bank wants and values in a prospective or existing client. They may not present themselves as effectively as they could when interacting with the bank. The following considerations are designed to guide commercial loan customers and their advisors in their dealings with commercial banks and bankers.
Key Considerations When Seeking a Commercial Loan
Research Potential Lenders
Before applying for a commercial loan, it is essential to research and evaluate potential lending institutions. Take time to thoroughly investigate different banks, focusing on their reputation, loan offerings, and whether they regularly work with businesses similar to yours. Assess each bank’s ability to meet your specific financing requirements and confirm that they have the financial capacity to provide the loan amount you are seeking. By carefully selecting a lender who aligns with your business needs, you can increase your chances of securing favorable loan terms and building a productive banking relationship.
Review Your Credit and Liens:
- Obtain a credit report and a UCC check on yourself and your business.
- Resolve any released liens and correct any inaccuracies found.
- Secure a Dun & Bradstreet report for your business and address any errors present in the report.
Creating a Business Plan:
A well-structured business plan is essential when seeking a commercial loan. Your business plan should clearly outline your company’s mission, objectives, products or services, target market, competitive landscape, and growth strategy. It should also detail the experience and qualifications of your management team, as this reassures lenders that your business is in capable hands.
Include comprehensive financial projections, such as income statements, balance sheets, and cash flow forecasts for at least the next three years. Clearly explain how you plan to use the loan proceeds and how the loan will contribute to your business’s success. Address potential risks and describe your strategies for managing them.
A professional and realistic business plan not only demonstrates your understanding of your business and market but also builds credibility with bankers, increasing your chances of securing favorable loan terms. Be sure to review and update your business plan regularly to reflect changes in your operations and market conditions.
Loan Applications.
- Avoid Multiple Applications: Limit the number of loan applications you submit, as each lending institution inquiry will appear on your credit report.
- Present a Banker-Friendly Proposal: Structure your loan proposal and collateral as you would expect if you were the banker evaluating the request.
- Submit a Complete Application: Ensure your loan application is thorough. Do not rely on the loan officer to complete or advocate for your application—make it easy for them to present you and your loan request.
- Package Your Application Professionally: Present your materials in a polished and organized manner, using binding, tabbing, indexing, and labeling to project a competent business image.
- Reach the Right Audience: Aim to have your application reviewed by your loan officer’s supervisors.
- Financial Statements: Provide personal financial statements using the bank’s form unless you have statements prepared by a CPA.
- Explain Your Financials: Attach footnotes to your financial statements if explanations are necessary, such as for future cash flow obligations on limited partnerships or contingent liabilities.
- Provide Appraisals and Reviews: Supply current appraisals and environmental reviews if required, and suggest that the lender obtain them. Offer to cover in-house costs before loan approval.
- Reference Bank Relationships: Mention other personnel you know at the bank and highlight any additional business relationships you maintain with the institution.
- Disclose Current Banking Relationships: Describe your current banking relationship, especially if it is positive, and provide a logical reason for seeking a new arrangement to avoid arousing suspicion.
- Include Guarantor Information: Submit detailed financial statements for all guarantors.
- Be Objective About Changes: Do not disparage your existing bank. Objectively state your reasons for transitioning, ideally focusing on the desire for improved service.
General Tips
- Clarify Repayment Sources: Clearly specify the sources of repayment and the expected timeline.
- Be Realistic: Avoid presenting overly optimistic projections.
- Be Accurate and Honest: Ensure all facts and financial statements are accurate; exaggeration undermines the credibility of your entire application.
- Address Difficult Questions Directly: Respond to challenging questions with clarity and honesty.
- Disclose Legal Issues: If you or your business are involved in litigation, obtain an analysis letter from your attorney.
- Be Transparent: Do not withhold information from your loan officer. Disclose any issues, as someone on the loan committee may already be aware of them.
- Offer Demand Deposit Accounts: Provide your demand deposit accounts (“DDAs”) to the bank. Establishing a comprehensive banking relationship is valuable, as profits are often found in DDAs and multiple engagements. Provide account statements for the last twelve months.
- Avoid Split Banking: Do not propose split banking unless the bank cannot meet all your requirements, as this approach is generally undesirable for the bank and can be risky.
- Be Reasonable in Negotiations: Avoid haggling over the last quarter of a point on the interest rate. Maintaining a positive relationship with your banker is more important than a minor rate saving.
- Address Legal Fees Early: Ask the bank to estimate or cap legal fees up front to prevent future disputes.
- Focus on Obtaining the Loan: Instruct your counsel that your primary goal is to secure the loan, not to win all documentation points with bank counsel.
- Ensure Commitment Letter Completeness: Make certain that the bank commitment letter is complete to prevent issues during closing and renewal. For example, some jurisdictions require business loans over a certain threshold to be in writing to be enforceable.
- Avoid Unusual Borrowing Entities: Do not borrow through entities like revocable or irrevocable trusts, corporations with minority shareholders, S corporations without proper explanations, or pension plans, as these can complicate the process.
- Simplify Corporate Structures: Avoid borrowing through multiple or complex corporate structures, as they complicate collateral liens.
- Use In-State Collateral: Do not use out-of-state collateral due to potential legal and monitoring difficulties.
- Provide Documentation Promptly: Quickly send both personal and corporate financial statements and tax returns to your banker.
- Update Your Documentation: Periodically refresh your documentation package for your banker.
- Meet Regularly With Your Loan Officer: Schedule regular meetings with your loan officer to discuss financial results and projections.
- Avoid Overdrafts: Make sure not to overdraw your accounts.
- Pay Loan Payments on Time: Submit loan payments promptly, preferably before the due date.
- Educate Your Banker: Take the time to familiarize your banker with your business operations.
- Invite On-Site Visits: Encourage your banker to tour your business premises.
- Listen to Your Banker: Pay attention to your banker’s advice—it may be valuable.
- Provide Access to Professional Advisors: Make your professional advisors available to answer any questions your banker may have.
- Allow Sufficient Lead Time: Give your banker enough advance notice for any requests.
- Respect Your Loan Officer’s Time: Remember your loan officer has other clients; be considerate of their time and workload.
- Limit Bank Switching: Avoid changing banks frequently.
- Ask For Specialized Services: Allow your bank the opportunity to offer specialized services before seeking options elsewhere.
- Avoid Filing Homestead Unless Required: Do not file a homestead on your home unless required by state law.
- Avoid Banking With Stockbrokers: If you want to be a valued banking customer, avoid conducting your banking with a stockbroker.
- Deliver Bad News Promptly: Inform the bank personally and as soon as possible if there is bad news.
- Keep the Bank Informed: Maintain open communication with your bank to prevent surprises.
- Refer Good Clients: Recommend reputable clients to your banker.