Even today, when everyone says “credit is tight”, borrowing is still the best way to go: rates are low, community lenders are eager to create jobs, and there are a growing number of government programs like the SBA loan guarantees.
But actually closing a loan can be difficult. Banks expect a business plan, financial forecasts to justify the loan amount, and even a personal guarantee, which might include your home as collateral. The prepared entrepreneur, however, knows the 7 secrets to winning the respect of the bank and the loan of your dreams.
To loosen up the bank’s lending, get an edge when negotiating and save yourself thousands in the long run, here’s the insider’s secrets:
1. Build a Personal Relationship
Bankers do business with people they know. They lend money to people they know and trust. The best loan negotiation starts when you begin building a strong personal relationship with a banker. Long before you put in a loan application, invite a banker to lunch. Give them a look at your current business, your home, your life. Gently let them know how serious you are about building the business of your dreams.
Plan to stay in touch with your banker(s) at least once a month. Since most loans will have terms beyond repayment (called loan covenants), you want your banker to know what is going on in your business and how you are using (or planning to use) his money.
2. Know the Secret Code
Every banker will tell you that approving a business loan depends on how well your company compares to other similar businesses. The bank looks primarily at your financial operating results. Be sure you check out the banker’s bible for these business metrics: Risk Management Association’s Annual Statement Studies, or “RMA” for short.
The RMA includes example operating results from more than 360 industries and can tell you what your banker expects to see on your financial statement or plan.
The RMA is available at your local library or bank – asking the banker to make a copy of the appropriate page is a great way to show them that you know what you’re talking about. Meeting key ratios from the RMA should be your goal as you qualify for, and keep, a business loan.
3. Give More Than You Get
Besides repaying the loan in full, what can you offer the bank? If you want to get a great loan, it never hurts to offer to open several other accounts at the same bank. Bankers love to have your “depository accounts” (checking and savings) and to help you with other fee -generating services like credit cards and wire transfers. If you are only interested in the bank for the money it can lend, you’re not going to impress anyone.
Shifting accounts to your new partner bank can be a great negotiating tactic — and might even clip the interest rate you’ll pay on the loan.
4. Plan for Failure
It sounds backwards, but you will gain a banker’s trust by telling him all the ways that your business could fail – and how you have planned to meet those challenges. This shows that you know your business and helps your banker defend your ideas to his loan review committee. [Remember, one banker cannot guarantee you a loan – all loan applications are reviewed by the bank’s underwriting committee.]
One key to helping the committee say yes is to discuss “key person risk”. If you die tomorrow, how would the bank get its money back? Every bank wants to know that you – and your business – have some life insurance set aside for this purpose (and a buy-sell agreement, which I discussed last week). It’s morbid. It’s expensive. But it shows that you are thinking through all possibilities and helping the bank cut its exposure to risk.
5. Plan the Work, Work the Plan
Loans are granted based on your projections and plans. In some cases, the lender will want to be sure you spend the money exactly as you planned.
Of course, no business plan can perfectly predict the future. You may have to explain each variance from your original budget and show the bank why the costs were necessary. Be prepared to present receipts for each purchase, and keep an eye on the calendar – your loan may very well have a deadline, after which it will no longer be available to pay expenses.
One key to making it work is to ask for a bit more than you think you’ll need. A “worst case” plan is always better than a wildly optimistic one. Bankers don’t like surprises unless they are happy ones!
6. Negotiate Smartly
Careful planning and good relationships can get you a great rate and reasonable terms that might save you thousands of dollars in the long run. But communicating what you need – and negotiating what is most important to you – will be even more important.
If you need to protect your home and retirement savings, make it clear that those things are off-limits as collateral. If you know that your business will need extra cash in 6 months, get those facts out in the open.
Don’t expect the bank to blindly accept your terms, but be sure you communicate all your ideas up front. You’ll get some of what you want, and at least the bank will understand your position on the rest.
For a well-prepared borrower, everything is negotiable.
7. Keep Your Eyes Open
Most business loans have covenants that can change every quarter or year, and almost all commercial loans are reviewed annually. Getting a loan is no guarantee that you can keep the loan. If you can’t meet the terms, be prepared to have the bank ask for their money back (“call the loan”) early.
There are two ways to avoid the worst — plan better or communicate problems more clearly. Its amazing how flexible bankers can be if they know you are communicating regularly and honestly… which I guess goes back to point #1… build a great relationship.
To keep the loans you need stay ahead of the game by using all the above strategies. Keep your banker informed. Keep the risk as low as possible. Plan ahead. And when all else fails, keep building relationships with other banks…just in case!
