Lender Gripes

Written by CMG News Contributor, Doug Carleton

With the economy suddenly booming, opportunities may appear to enable you to grow or expand your business if you can obtain financing. If you decide to pursue a bank loan, here are a few things to avoid as they may make an unfavorable impression on a lender.

Gripe: Lack of specificity in the use of the borrowed funds. Frequently "working capital "is stated as the general use of funds. This purpose for borrowing needs to be specific. Salaries? How much? Overhead? What overhead? Overhead includes many expenses. Be as straightforward as possible. A lender knows you cannot be exact, but you will be perceived as unprepared without a breakdown of your anticipated use of funds.

Gripe: Not understanding that a bank won't finance 100% of your needs. A borrower has to commit some of their own money to the project's cost before the bank finances the rest. Whatever that amount is that you have to put into the equation - it cannot be borrowed. Borrowing your equity injection from another party adds another layer of debt to your balance sheet, essentially creating 100% financing. That will not fly. Your injection must also be reflected on your balance sheet or personal financial statement as readily available and in your account when you apply for a loan. If not, the banker is likely to turn down your application due to your lack of capacity.

Gripe: Not understanding that banks want and need to take collateral to secure the loan. Banks are required to take collateral to secure the loan if it is available. However, this doesn't mean that the bank won't approve a loan if it cannot be fully collateralized. But if the collateral is available, the bank will take a security interest until the loan is repaid in full. Understand that the banks are heavily regulated both on a federal and state level. Sometimes there are loans a bank may like to approve but cannot due to restrictions in laws or regulations.

Gripe: Supplying projections with even rounded numbers, year over year, with set percentage increases. It would be impossible, but I have seen these types of projections many times. Recently, I was working with a referral from an organization with which I counsel small businesses, and the three-year projections were (leaving out the zeros) - Year 1: $1; Year 2: $2; Year 3; $4. The projections doubled each year to exactly and incrementally to an even, round number. I advised the client that this result was impossible and that a bank would not accept these projections. He argued and told me I was wrong—bad idea.

This list is a heads-up of the considerations a banker takes when reviewing your application for a loan. Not all of these points (financial statements excepted) may come into play. However, it pays to be prepared.

This blog entry is a slightly edited excerpt from Doug Carleton's 'The Daily Life Of A Small Business Owner' series. Doug was a mentor with SCORE, Startup Virginia, and Lighthouse Labs, and has 25+ years of experience in small business finance including 12 years in SBA lending. To contact Doug directly, please email him at sbaloanspecialist@comcast.net.