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How to Get a Loan When Banks Aren’t Lending

how to get a loan when banks aren't lending

You need capital, but you’re having trouble securing the financing you need.  So how to get a loan when banks aren’t lending?

This situation reminds me of the famous NBC Television show, “The Office”, the hilarious documentary-style show that comments on the life of a standard corporate office. If you haven’t seen the show, I’d definitely recommend it.

In one of the episodes, the antagonist and regional manager, Michael Scott, has worked at Dunder Mifflin Paper Company for over 19 years and quits (spoiler alert!). He decides to start his own paper company with almost no capital, along with two other employees in the office who also quit. Slowly, he takes clients away from Dunder Mifflin and grows in revenues. As a result of his sudden growth in clients, he buys a van and wakes up at 3 in the morning to distribute the paper in the area.

After consulting with an accountant, he finds out that he has to declare bankruptcy because he was growing the business too fast, and that the revenues would not cover the growth of the business. They required wages, rent, and variable costs associated with manufacturing and distributing the paper. Because of the digital age, the demand for paper wasn’t so hot either.

What happens when we grow ourselves out of business? Michael’s problem was simple: he had no outside investors, and zero loans from the bank. Therefore, he had no money to cover the fast expansion. Sound familiar? In this article, we will discuss how to get a loan from the bank when they aren’t lending.

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Bank Lending Cycle: A Recap

Last week, we discussed the bank lending cycle and why banks may tighten their lending. There are two reasons why that might happen…

Loans and the Economy

If the economy is undergoing or overcoming a financial crisis, banks tend to lend less. During this time, businesses might have to look elsewhere for financial assistance.

Conversely, if the economy is booming and the lending environment becomes less risky, banks might lend more. These periods are characterized by lower interest rates and better terms.

But what happens when things are looking up? It’s easier to obtain a loan because of the economy, but with all the capital in the marketplace, an economic bubble builds. After a while, that bubble will burst and we’ll find ourselves in a financial crisis again.

 The Environment affects the Economy

The economy may affect the environment, but the events in the environment also affect the economy. We used the housing market crisis in 2007 as an example. Imagine walking into your job the next day, without reading or watching the news, expecting to make a sale. Yikes! You have to know your environment to make good investment decisions.

How to Get a Loan When Banks Aren’t Lending

We discussed the cyclical nature of bank lending and how to understand the industry. Now, we will analyze how to best appeal to the bankers and how to get a loan when banks aren’t lending. Regardless of the economy, the banker still has to evaluate how risky the investment is. What is the best way to appeal to bankers? Preparing a package of these five things will get you there:

1. Know Your Economics

Preparing at least three years of business financial statements and one or two years of financial projections goes a long way. In addition, you should also list out how you will use the loan. By preparing a projection of financial statements, this should be easy.

2. Build Sound Business Credit

Knowing where you stand with your credit is useful. If there are any inaccuracies, you can correct them without having the bank check and deny you a loan. If you have lower credit than you had originally hoped, maybe you can hold off on applying for a loan until you are ready.

3. Provide Documentation of Personal Loans

Providing documentation of personal loans is equivalent to providing evidence and saying, “I am worthy of your loan!” Personal loans, business loans… they both demonstrate that you owe someone money, and showing the history of your loan relationships indicates the type of relationship you might have with the bank.

4. Prepare Questions

In a way, preparing a package for the bank should answer all the questions they might have. This includes “how much money do you need,” “how long might you need this loan,” “what will you use it for,” etc.

5. Log Prior Experience

This is less about numbers and more about character. Logging your experience in companies, vendor relationshipslender relationships, and references shows more than how much money you have or will have. It shows the commitment and effort of a borrower.

Other Sources of Loans

Don’t put all your eggs into one basket. Have a backup plan just in case banks really aren’t willing to loan anything to your company. Smaller businesses are less likely to obtain a large loan from a bank if they are less than 10 years old.

SBA Loans

SBA is the Small Business Administration. They provide loans if you’re starting up a new company, or even if you just want to expand your business. Basic 7(a), Certified Development Company (CDC) 504, and the Microloan program are examples of the loan programs they provide.

Personal Loans

It may not seem much, but $20 from your family members adds up. Using your savings and other means of personal loans, you can finance yourself through startup costs. Just make sure not to forget about your payments, or run your credit too high!

Conclusion

In conclusion, banks won’t loan to just anyone… and sometimes that’s not your fault. Sometimes, it’s just bad timing. What happens in your environment isn’t up to you, but it is your responsibility to stay updated on those facts. Creating a package for your business will increase the likelihood that you’ll get a loan because you’ll be making the bank’s life easier. Rather than them scrambling to find your information, you can simply lay it out for them. And if all else fails, banks are not the only source of loans. With a bit of ingenuity, you can get there.

Save your time and prepare for the future now. Know your numbers and where your company is the weakest. The best way to start doing that is to download our KPI Discovery Cheatsheet today!

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Bank Lending Cycle: Cracking the Code

bank lending cycleSo your cash is tight and your loan renewal is approaching, but sales are picking up and you need additional capital to keep up the pace.  You approach your banker about increasing your line or obtaining new financing and they aren’t willing to take the risk. What now?

This isn’t a new story. In fact, if you’re in finance, either you or the person in the office next to you has experienced this. In this blog we’ll give you some general guidelines on what to watch out for in the bank lending cycle.

What is the Lending Cycle?

After a financial crisis, banks tend to tighten up their loan underwriting making capital more difficult to obtain. During this time, businesses seeking additional sources of funding will likely face an uphill battle convincing their lender that they are a risk worth taking.

As the economy improves and the lending environment becomes less risky, credit structures begin to soften and financing becomes easier to obtain.  These easy-to-borrow periods are marked by lower interest rates, lower requirements and conditions, and a large amount of available credit.

Not surprisingly, with all the new capital in the marketplace, an economic bubble builds. Eventually, the bubble bursts causing another financial crisis and the cycle begins anew.

When determining whether or not a banker wants to lend to you, they usually evaluate how risky the investment is. Obviously, banks do not lend to anyone and everyone. Rather, they calculate how much of their lending is trustworthy. What is this company’s credit history? What other debt do they have? How are their financials?  These are just a few things that a lender evaluates before making the final decision.

Why is the bank playing hard-to-get?

As a business person, you’re probably familiar with how “flirty” a bank can get with you. When you actually need the loan, they don’t want to give it to you. Then they tease you with a good rate and terms when you don’t need the loan. This isn’t just because you walked in wearing the wrong clothes, or even because of your numbers. Sometimes, because of the bank lending cycle, it’s just more difficult to get a loan at that time.

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Loans and the Economy

In one of our Wolff Center for Entrepreneurship classes, I asked the question: “Is it a good idea to start a business in a recession? Raise your hand if you think it is.” Only a few people raised their hands. In a way, it is a good idea, and this is why:

Like any product in the economy, prices and rates fluctuate due to supply and demand. When the demand is lower for a loan, banks are more inclined to charge a lower interest rate. When demand is high, banks implement a higher interest rate. During a recession, businesses are more debt-averse, driving down interest rates. When rates are low, there’s pretty much a “discount” to take out a loan. And every entrepreneur loves a discount.

Similar to demand, supply also affects the interest rates for a bank loan. When banks are flush with cash from customer deposits, they need to put those assets into service in the form of loans.  With lots to lend, banks tend to offer more attractive credit terms and interest rates. When the economy is suffering and banks don’t have as much on deposit, the supply of capital is diminished and, consequently, is more expensive.

The Environment affects the Economy

This is why it is crucial to understand the environment and industry your company is associated with. It amazes me how many people conduct business without reading or looking into their industry’s current events. Those current events affect what sale you’re going to make, how cheap your supplier will sell you a part, and… whether or not it will be possible to get a loan.

Imagine walking into work a day after the housing market crisis in 2007 and saying, “I’m going to invest in a condo.” Assuming you’ll still have a job at that point, anyway. If you take away anything from this article, understand this: Stay updated in your industry, because those events directly affect the economy.

Loan Officers are Actually Salespeople

bank lending cycleLoan officers are people who recommend consumer, commercial, and mortgage business loans for approval. They typically work as intermediaries for the bank lenders and the borrowers. A person represents an entity, and promotes a product for a commission… sound familiar?

Loan officers are really salespeople selling loans. They have quotas like salespeople. When there is low demand or availability of capital, loan officers are often less aggressive or even laid off. This is similar to a salesperson who is laid off due to a decrease in revenues. When capital is flooding the market, banks will often hire hoardes of new loan officers to put their money to work.  This explains why your banker rarely calls on you when you really need them but pursues you doggedly when times are good.

Conclusion

In conclusion, the economy affects the bank lending cycle. It may seem like common knowledge to stay aware of your industry, but you would be surprised how many clients I meet that have no idea what is really happening in the world. If you understand the economy, then you’ll understand the patterns of what a bank needs. A bank is like a business, so if you start thinking like a bank (which you most likely already do), then you’ll be speaking their language in no time. Catch next week’s blog about how to appeal to your banker, and how to get a loan even when banks aren’t budging.

What do you do when your banks aren’t budging? Now’s the time to really think like a CFO. Download our three best tools in the company to start speaking the CFO language.

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What Lenders Look At?

See Also:
Relationship With Your Lender
What Does a Lender Want to Know
Don’t Tell Your Lender Everything
Due Diligence on Lenders
Finding the Right Lender

What Lenders Look At?

I recently spoke to students at the University of Houston in the Wolff Center for Entrepreneurship on the topic of Dealing with Lenders. During the question and answer portion of the program, I was asked by a student, what lenders look at when they are deciding whether or not to approve a loan.

I answered the question by saying all lenders start with looking at the C’s of credit. There are normally five Cs of credit which I will define in a minute. But, the really important issue in getting your transaction approved rests upon your ability to present your case in satisfying each of the C’s.


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5 Cs of Credit

Depending upon your lender, the weight assigned to each “C” may vary, so you must understand the order of importance to the specific lender you are dealing with.

Character

The first C is Character. Normally borrowers don’t consider this but, lenders do. Lenders look at such things as your willingness to pay obligations, morality, and integrity. Lenders determine the borrower’s business character based on the historical information. To form an opinion on character, lenders will review the borrowers past success, payment history, and intangibles such as personal credit, family background and employment records.

Capacity

Another C is the borrower’s Capacity to pay. The lender normally looks to the business and determines if the business has a history of successful operations. The lender will determine if the business has paid their debts when they were due and shown a proven ability to generate cash flow. If you are trying to fund a start up, you must show prior business experience relating to the operation of the business you are trying to start. You must provide evidence of the capability of operating successfully and paying your bills.

Capital

Next, lenders look at another C Capital. Capital is the equity or net worth of a company. Capital signifies the company’s financial strength as a credit risk. The more capital a company has, the smaller the credit risk. Your company needs a history showing increasing sales, profits and net worth. Additionally, your company needs favorable trends in your operations, such as, constant or increasing gross profit margins.

Conditions

Another of the C’s is Conditions. Lenders will analyze how current and expected economic situations may affect your business. Such items might include past and current political history, and business cycles for you and who you sell to. Normally, the lenders like industries that are in periods of dynamic growth.

Collateral

The final C is Collateral. Lenders will determine the company’s ability to access and provide additional resources such as, equity or other assets, to use for repayment if the company’s capacity or character fails.

By addressing these C’s in your business plan and on your loan application you make the lender’s job faster and easier. Therefore, understanding and selling your C’s will improve your chances of getting the lender to approve your request.

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Choosing a Bank

See Also:
What are the 7 Cs of banking
Categories of Banks
Finding The Right Lender
How Important is Personal Credit When Negotiating a Commercial Loan?
Bank Reconciliation

Choosing a Bank: Which Bank to Choose?

I was involved in a speaking engagement recently with my friend, a banker named Larry from Community Bank located here in Houston. After our talk a gentleman from the audience, Al, asked us “Are banks different and if so, which one should I choose?” Larry answered first and after his response all I could say was “I agreed.”

Larry started by saying “Yes banks are different.”

He continued by telling Al that “Part of my answer I know you didn’t request but it is necessary information you need to consider.”

“To answer your question I feel that it is essential for small business owners to write out what they want and need from a bank. This is no different than having specific criteria or objectives in looking for an employee. What do you want the banker and bank to do for you and your business? Then, as you interview banks tell them what your needs and expectations will be and that you require them to be met. Larry stressed this point “Voice them now or be sorry later!”


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5 Considerations for Choosing a Bank

Larry went on to say that for larger businesses there are 5 primary areas of concern that need to be questioned during the process of choosing a bank:

1) Financial Standing

Review the bank’s financial statements. If the bank is a public corporation their financial information is available at www.sec.gov. If they are a private company their financial information is available at www.fdic.gov. Your areas of concern while looking at the financial information are: a) is the net worth of the bank increasing annually, which usually means they are making a profit and b) are bad loans increasing or decreasing. Ask the banker why there are changes in the net worth or bad loans because, rest assured, the banker will ask you why there are changes in your business. Just like a bank will not loan you money when your company is losing money, you do not want to be involved with a bank that is making poor business decisions.

2) Community Standing

What is the perception of the bank by leaders in the community? Talk to business leaders in the primary business sectors, such as real estate, retail, wholesale. Or even to your competitors who may be customers of the bank you are considering.

3) Lending Appetite by the Bank

Larry said “Al, there are two concerns in it this area you should address.”

a) Risk appetites (tolerances) – You need to ask the banker the bank’s lending philosophies, such as loan advance percentages against collateral and loan policies to make sure your business fits within what the bank wants and you can accept.

b) Loan appetites – Is the bank mainly a consumer or commercial lender? What industries specialization does the bank promote? Make sure they already understand your business, because you don’t have time to teach them. What types of loans does the bank not want to make?

Banks’ may mainly make loans on income producing real estate or loans to owner occupied businesses. If you are looking for something else, it is probably not going to happen with the bank you are talking too. What size loan customers does the bank want? Banks normally consider a small business one which has revenues less than $2 million. They define lower middle market businesses as those with revenues from $2 million to $30 million. Finally, they consider middle market businesses as having revenues from $30 million to $250 million. Make sure your company fits into the size the bank wants, or you may not be satisfied with the bank’s effort to get and retain your business.

4) Loan Office Experience Level

“Do you want to deal with an order taker or a decision maker?”

5) Bank’s Desire

Do you feel they are interested and excited about doing business with you? Recall your dating days, how you got excited if the other person appeared interested! This is about establishing a relationship. Is there connection between you and the bank? You must remember there is a price to pay if you have to change your banking relationship.

Larry finished by telling Al, “What it really boils down to is two people getting to know one another and seeing if their needs match.”

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Relationship With Your Lender

See Also:
What do Lenders Really Look at
What Does a Lender Want to Know
Don’t Tell Your Lender Everything
Due Diligence on Lenders
Every Business Has a Funding Source, Few Have a Lender

Relationship With Your Lender

The question I get most often from people is “What affects my relationship with my lender the most?”

Communication

The answer is communication. Communication or lack there of is the greatest area of weakness between entrepreneurs and their lenders. When news is bad, entrepreneurs tend to shut down communication thinking the lender will be upset. The entrepreneur needs to understand that the lender may be concerned, and their reactions will be far less negative than if they are told nothing. Just as in your personal relationship, nothing upsets your partner more than surprises. The same is true with your lender.

Changing Jobs

Don’t blame yourself totally, because not all the weaknesses in this lending relationship rest with the entrepreneur. Lenders change jobs more frequently than politicians change their minds. As a result of these jobs changes, many lenders are unfamiliar with their customers, and become wary of extending credit even when the business deserves the credit.

Relationships Are Challenging

Relationships, whether personal or business, are always challenging. But in order for the entrepreneur to survive, an environment must be created that is conducive to fostering a productive, long-lasting relationship with your lender. Clear, frequent, open lines of communication are the most necessary component of a strong entrepreneur-lender relationship. Business owners and lenders should talk at least quarterly. And, when things are changing rapidly in the business, they may need to be talking weekly.

Invite Your Banker Inside

Lenders will always require financial statements and the frequency will depend on the type of loan. However, the entrepreneur has to realize there is more involved in communication than mailing out financial statements. Invite the lender to tour you facilities, but don’t extend the invitation just before you need their money, as that will create suspicion. Communicate with your lender when something important happens, such as gaining a major account. Be sure to put your comments in writing. This provides your lender with documentation should questions arise.

Conclusion

And remember, a lending relationship is identical to any relationship, because it is based on trust. Therefore, a lending relationship is the same as your personal relationship, in that it needs to be nurtured day in and day out, not once a year. To learn more financial leadership skills, download the free 7 Habits of Highly Effective CFOs.

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National Stock Exchange of India (NSE)

See Also:
Common Stock Definition
Over the Counter Bulletin Board (OTCBB)
Currency Exchange Rates
Non-Investment Grade Bonds (Unsecured Debentures)
Australian Securities Exchange (ASX)

National Stock Exchange of India (NSE) Definition

The National Stock Exchange of India or NSE for short is the largest stock exchange market in India. It is the third largest in the world in terms of trading volume as well as the second fastest growing in the world today.

National Stock Exchange of India (NSE) Meaning

Located in Mumbai, India the NSE stock exchange was started by the Indian government in the year 1992. The National Stock Exchange is the largest next to the Bombay Stock Exchange (BSE). It can be used for most of the markets that you would find in any of the stock exchanges like stocks, bonds, futures, derivatives, mutual funds, etc. The NSE’s hours are from 9:00 AM – 3:30 PM Indian Time. The two leading owners in the NSE stock is the New York Stock Exchange (NYSE) as well as Goldman Sachs. Other owners include local banks and financial institutions around India.

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National Stock Exchange of India

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Nominal Interest Rate Definition

See Also:
What is Compound Interest
Effective Rate of Interest Calculation
Interest Expense
When is Interest Rate Not as Important in Selecting a Loan?
Interest Rate Swaps

Nominal Interest Rate Definition

A nominal interest rate is the interest rate rate quoted on lending and borrowing transactions. Nominal rates represent the rate of exchange between current and future dollars, unadjusted for the effects of inflation. Since nominal rates are not adjusted for inflation, they do not convey the prices of lending and borrowing transactions as accurately as real interest rates.

Nominal Interest Rate, Real Interest Rate

Nominal interest rates are not adjusted for inflation. Whereas, real interest rates are adjusted for inflation. Make the adjustment with current or projected inflation rates. Furthermore, real interest rates offer a more accurate representation of the prices of lending and borrowing transactions. To calculate real interest rates, use the following formula:

Real Interest Rate = Nominal Interest Rate – Inflation Rate

For example, if a lender offers a loan with a nominal rate of 5% and the inflation rate is 3%, then the lender will earn real interest of 2%. However, if the inflation rate is 7%, then the lender will essentially be losing value on the loan.

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Nominal Interest Rate Definition

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