Traditional bank financing is often out of reach for struggling business owners
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Financing an Underperforming Company
Traditional, conservative bank financing is usually the cheapest money you will likely find. Trouble is, you should make the borrowing arrangements when you are financially healthy - which is usually well before you foresee the need for it. Banks look at several factors when considering an application, but most important is your ability to repay what is borrowed. This is demonstrated primarily through your Business Plan, Financial Statements (Profit & Loss, Balance Sheet, and Cash Flow) and Credit History. Arrive at the bank prepared with a complete finance package, showing two years of profits, strong financial ratios and a good to great credit rating or you'll likely come back empty-handed.
Not all banks are created equal. Smaller, local and regional banks make their living serving local small and mid-sized firms. Larger, national banks may have small business products, but you may find them laden with fees and difficult to work with in a crisis.
If you're looking for financing under $50,000 you'll likely be working with a local branch manager or loan officer. Most will be looking for secure collateral (real estate, equipment, inventory, or in some circumstances accounts receivable) held by the business or you could be asked for a personal guarantee. CAUTION: Personal guarantees erode the shield of immunity you created when you incorporated, so be careful to exhaust other possibilities first.
If your banker turns you down, ask what it will take to be considered favirably in the future and for a referral to other sources of financing.
CrownWatermark receives referrals from bankers when potential customers have submitted an incomplete finance package or have indaequate collateral or credit scores. We can reposition you to resubmit for approval once you meet their criteria, or help you seek financing through a secondary market lender.
Call us at 253-279-4067 for a FREE consultation on putting together a successful bank finance package.
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The basic bank term loan is still one of the cheapest, most popular ways to finance a business. Term loans typically have fixed interest rates, monthly or quarterly repayment schedules, and a set maturity date. You will have to put down 20 to 25 percent of the total you want financed, because the banks want you to carry some of the risk. What do banks look for when deciding to make loans? The "five C's" are of the utmost importance:
1. Character: How have you managed other loans (business and personal)? What is your business experience? If you're a corporate executive and want to open a restaurant, you'd better have some restaurant experience.
2. Credit Capacity: The bank will conduct a full credit analysis, including a detailed review of your financial statements and personal finances.
3. Collateral: It's the primary source of repayment. Expect the bank to want this source to be larger than the amount you're borrowing.
4. Capital: What assets do you own that can quickly be turned into cash if necessary? The bank wants to know what you own outside of the business—bonds, stocks, apartment buildings—that might be an alternate repayment source. If there is a loss, your assets are tapped first, not the bank's. You will most likely have to add a personal guarantee to all of that, too.
5. Comfort/Confidence with your Business Plan: How accurate are your revenue and expense projections? You can expect the bank to make a detailed judgment. What is the condition of the economy and the industry?
Pay attention to the following "red flags," which make a banker less likely to lend to you:
Poor credit reports: If your credit report is blemished, the bank will naturally wonder why you would pay it on time when you have failed to do so for others.
Absence of a down payment: If you don't have a down payment ready, expect the bank to assume you have not thought ahead.
Poor collateral: Banks want to see liquid assets, which will be assessed on their market value, not on what you paid for them or what you think they're worth.
A poor business plan or none at all: Make sure you have one, and be sure it's realistic.
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