With the right approach, applying for a loan doesn’t have to be painful. The following best practices, garnered from local experts, can help business owners successfully obtain a new loan or restructure an existing one.
“Right now is a great time to restructure debt because interest rates are so low,” said Dave Hansen, Columbia Bank’s senior VP and regional manager for the Portland/Vancouver area.
Is now the time?
Buck Heidrick, a certified business advisor with the Washington Small Business Development Center, said that restructuring or getting a new loan makes sense “any time the interest rates are favorable enough that after you pay all the fees and restructuring costs, you walk away with a loan payment that is at least 10 percent lower than before.”
Also, he said, refinancing a 20-year loan at the same rate with a 10-year payoff can reduce cash outlay.
Besides interest rates, business performance can factor into loan timing. For example, if net profit is lower than usual, the bank will look less favorably at that. One thing that can affect net profit is if a business reinvests profits to minimize tax implications.
“You always want to reinvest in your company, but minimizing the tax burden through reinvestment can have negative effects,” said Heidrick.
Currently pending legislation, if it passes, could increase the limit on section 179 deductions (which allow businesses to expense up to $25,000 in equipment expenditures for equipment that is in service by the last day of the year). Hansen said that in the next three weeks, that limit could be bumped up considerably.
Get your ducks in a row
“When banks are approached by owners for a loan, they are looking for certain things, primarily solid financials.” This advice comes from Dan Jackson, a partner in B2B CFO Partners LLC, a national organization of about 230 CFOs that provide advisory and consulting services to businesses.
Jackson, a Vancouver resident with more than a decade of CFO experience, said that banks are particular about accurate balance sheets, fluctuating margins and financial models and forecasts.
“Anything submitted to a bank has to have been properly vetted,” cautioned Jackson, prior CFO for Red Lion Hotels and KinderCare Learning Centers. “If you don’t have a strong accounting staff, you might want to consider bringing in a person to help with that process.”
Hansen added that the financials should be as current and complete as possible, including interim financial statements, personal financial statement and two to three years of tax returns for both the business and the business owner.
“The more complete information we have, the faster we can move and the better job we can do,” said Hansen.
Heidrick said that a business plan is also an important tool for obtaining or restructuring a loan.
“Business plans aren’t just for startups,” said Heidrick. “All businesses should have an active plan that maps out where they’re going over the next year or two.”
Hansen added that it is helpful, in addition to the business plan, if the loan applicant supplies a detailed summary of what the new loan is for, why it is necessary and how it will help the business grow.
Choose the right partner
Heidrick said he encourages business owners to choose a bank that you have a close a relationship with. The loan decision maker should be easily accessible and have enough authority to influence loan decisions.
Jackson cautioned that “rate is not everything.” Smaller banks, he said, may be able to give business owners more personal attention. However, business owners should select a bank that can grow with the company. Larger banks can offer services (such as insurance and wealth management) that small banks may not offer. A good way to find the right partner is to talk to other business owners to see who they use as a bank, said Jackson.
“If they’re happy with their bank, that’s probably a bank you should add to your list.”
Heidrick said that business owners should ask the bank to provide a preliminary indicator of approval in the first three days to a week, because if the loan is not going to go through, “you need to move on to another bank.”
Build – and keep – a relationship
“If you’re looking for just a low-interest loan, that’s a commodity,” said Jackson. “You can put out a request and find a lot of banks that are interested in loaning.” But, he cautioned, this is not the smart way to proceed. Instead, businesses should look at the total picture.
“Find a bank that will partner with you, not only on the initial loan request but also on being your long-term banker,” Jackson said.
Heidrick agreed, saying “I coach my business people to create and maintain a relationship with the bank. If they don’t take the initiative to check on you and you’re doing well, you need to take the initiative to meet with your banker. It’s a relationship-based economy.”
Keeping in touch with your banker is good, said Hansen, because “bankers hate surprises.”
“If we understand what’s going on, we can put together a better package,” he said.
So, for example, if a business knows that in six months they are going to acquire new equipment, the business owner should share that information with the bank. Because, said Hansen, if the bank knows, the bank can design a financing package that takes those future plans into consideration and be prepared to act more quickly than if it comes up later at the last minute.
“Have open conversations about where the business is headed, not just where you’ve been,” advised Hansen.
In addition, said Heidrick, business owners should regularly talk to their bankers about the bank’s loan portfolio because that can help business owners plan ahead.
“Maybe when you got your original loan their interest was in brewpubs,” explained Heidrick. “But if now they are overextended in brewpubs, you may not be able to get a loan to open a second location.”
And finally, said Hansen, “banks are anxious to lend money, but people should be willing to bring their whole relationship to the bank.”
He explained that if a business wants only a loan from a bank, but places other banking functions at a different institution, it complicates the loan application process. In fact, he said, offering to bring a business’ entire banking package to a new bank is a considerable leverage point that business owners can wield.
Have a backup plan
What if the loan application is denied? When applying for a new loan, Jackson said, business owners should not limit their search to just one bank. He recommended identifying three banks that would be appropriate. If the first bank declines the loan, try the next one.
Heidrick said that there are a variety of alternatives to bank funding. These include private investors, the angel investment community and self-funding operations. Crowdfunding (about which Washington state issued new rules in November) and SBA loans are also options. The challenge for crowdfunding, said Heidrick, is to have something compelling enough to get people’s attention. Jackson said that while many people steer away from SBA loans for fear of complexity, in reality applying for an SBA loan “is not onerous.”
“The number of SBA loans that are being made tends to indicate that money is available,” said Jackson.
“Approach the banks, but have options up your sleeve,” said Heidrick. “If you’re seriously committed to being successful, look at other alternatives.”
Plan ahead
The best time to borrow money, said Jackson, “is when you don’t have to.”
If you’re under pressure, you don’t always get the best deal, or have the time to do it right. So, he explained, business owners should look ahead via business models and forecasting.
Hansen concurred, encouraging business to “forge a relationship right now, even if you don’t have a need.”
“Start planning for when your existing loan matures, and you’re ahead of the game,” added Jackson.
Putting self-funding to work
As an example of alternative funding options, Buck Heidrick, a certified business advisor with the Washington Small Business Development Center, reported that a local manufacturer has set up a customer finance program. He negotiated terms of 45 days from suppliers, and asks customers for 50 percent up front to cover manufacturing costs, then 25 percent before delivery, then the balance on delivery. With a schedule that allows 15 to 20 days for completion and 30-day delivery, the manufacturer has 15 days of materials money available for use.
This approach, said Heidrick, “cuts the bank completely out of the deal, and is a real risk for banks if people figure out how to do that on a mass scale.”
