By Joseph Anthony
Even as interest rates remain at attractive levels, many people looking to start or expand a business venture are having trouble getting a loan. Banks may be pushing great deals on home-equity credit lines and other loan offerings, but they also are being extremely selective about who they lend to. Now more than ever, you must engender the trust and confidence of your lender. There’s no magic bullet that you can fire to bag yourself a trophy loan. But there are some guidelines that can put you on the right path to your quarry.
Here are seven do’s and don’ts when applying for a business loan:
Even if you’re not organized, look organized
Yes, it’s especially hard when you’re trying to grow a business and changing your company’s internal systems to meet that growth. But this is when looking sharp is even more important.” I think the thing that will really impress a banker and get him excited about a borrower is a well-organized package,” says Bob Bifolco, executive vice president with Progress Bank in Blue Bell, Pennsylvania. What Bifolco likes to see: Three years of tax returns, an interim financial statement, listings of receivables and payables, insurance records that show what equipment the company owns and the assets’ possible replacement value, and a cash-flow statement for the past year. “You bring in a package like that and the banker is likely to immediately deem you as a sophisticated prospect who is running the business in a sound financial manner,” Bifolco says.
Clean up your ‘a/r’ and your ‘a/p’
That’s accountant-speak for accounts receivable and accounts payable. The problem is pretty simple: Lenders don’t like it when they see a business waiting for lots of money to come in (accounts receivable). “If somebody is getting paid in 90 days but has to pay his vendors in 30 days, we feel like he has a problem,” says Merv Shorr, senior vice president with Banco Popular North America. Old accounts receivable aren’t just an indicator of slow-paying clients — they also can be a red flag for nonpaying accounts. Lenders may want to see a reserve for bad debts to reflect potential uncollectible bills.
Your assets: Know that lenders care about what they are worth now
“Bankers are going to want to tie up more assets than the loan is worth whenever possible,” says Dana Barfield, a financial planner in Richardson, Texas, who specializes in planning for businesses with up to $80 million in revenues. So lenders will look at your assets not in terms of what you paid for them, but rather in terms of what they could be sold for if the business is ever to be liquidated. Overall, this is going to favor the manufacturer with a brand-new production line over the information services business with rapidly depreciating computer equipment. You can’t do much about this, but be aware and plan accordingly.
Improve your loan-to-value ratio
Desirable loan-to-value ratios vary by industry. Leasing companies, for example, tend to have higher acceptable loan-to-value ratios. Bifolco says that, in general, he likes to see loan-to-value ratios of 3-to-1 or less; Shorr suggests that 4-to-1 is a winner. But there isn’t a strict bar for this ratio. “What I’m looking for is a snapshot that will tell me if this company can make it through a few rainy days, through a couple of recessions,” Bifolco says. “Not being overleveraged is part of that.”
Remember that lenders want interest payments plus
It’s not unusual for people looking to borrow money to consider themselves good risks if they can show that they can service the debt — that is, produce enough monthly cash to pay the interest on the loan. But that’s not enough for lenders these days. Most of them want to see that you can generate enough cash to not only service the debt but also to pay back principal. So instead of just interest coverage, you have to think about — and be able to show — how the business will have total debt coverage.
Yes, they want you borrowing, but not too much
A business that has a track record of borrowing and repaying always has a leg up on getting a new loan. But lenders don’t like to see debt servicing consuming too much income. Debt-to-income ratios of less than 40 percent are preferred. That means if you are making $10,000 in profits monthly, not more than $4,000 of that should be getting siphoned off for debt servicing.” In general, we really don’t like debt-to-income ratios of 50 percent or more,” says Melissa Hammit, commercial credit analyst for Woodforest National Bank in Woodlands, Texas.
Personal credit dings? Hold back a bit
Lenders say that good personal credit can help with a business loan, especially since many small-business borrowers have to guarantee the loan personally. The reverse is also true: Some dings on your record could hurt you. So try to hold off on applying for a business loan if you’ve recently missed some payments or had other credit problems. Going more than a full year with a clean personal credit record can make a difference when signing that business loan application.