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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.

Don’t lose track of your company’s metrics. For advice on how to identify your KPIs and how to track them, access our free KPI Discovery Cheatsheet!

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 Appeal to Bankers

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. 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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how to get a loan when banks aren't lending

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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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7 C’s of Banking

See Also:
5 Cs of Credit
Line of Credit
Credit Rating Agencies
How Important is Personal Credit in Negotiating a Commercial Loan?
Improve Your Credit Score

7 C’s of Banking

Every knows the 5 C’s of Banking. But what are the 7 C’s of Banking? Recently, I 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, a student asked me “What do lenders really look at when they are deciding whether or not to approve a loan?”

7 C’s of Credit: Condition

Is there a logical need for the funds? Does it make business sense? Are the funds to be used to grow an existing and proven business product or service business or to be used for an unproven one?

7 C’s of Credit: Collateral

Is the proposed collateral sufficient? What type of value does it have? Is there a secondary market for it? The lender wants to know, in the event of a default, that it will be likely to recoup a significant portion of the amount lent.

7 C’s of Credit: Credit

For smaller enterprises, the personal credit score of the individual owner(s) will be reviewed. As with personal loans, such as an auto or mortgage loan, the bank is looking for evidence of a history of you paying your lenders on time. For larger companies, the bank will consult Dun & Bradstreet reports for evidence of the timely payment of vendors and other creditors.

7 C’s of Credit: Character

What do those who have done business with the prospective borrower have to say about its business practices? A bank will typically ask the applicant for a list of references, such as three customers and three vendors to contact.

7 C’s of Credit: Capacity

Does the borrower have the wherewithal to pay the debt service? Is it generating enough free cash flow to reasonably assure timely interest payments and ultimately the repayment of the principal balance?

Due to the expanding levels of transnational business and cross-border lending over the last few decades, you need to discuss the two new C’s.

7 C’s of Credit: Currency

What is the recent history and outlook of the primary currency in which the company will conduct its operations? Does the currency exhibit a history or likelihood of losing its value? The more stable the currency, the more attractive the loan request will be to a lender.

7 C’s of Credit: Country

Does the borrower conduct a significant portion of its operations in a country with a history of political instability? Is there the possibility of an expropriation of the borrower’s assets due to a change in the country’s government? Is the country’s current political and legal system hostile to the interests of foreign countries? There are two factors that would make the bank more likely to be willing to make the loan, including the following:

  • The more established the country’s government is
  • The more a legal system has demonstrated a reverence for bother property rights and the rights of creditors

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Interest Rate in Selecting a Loan

Interest Rate in Selecting a Loan

Why is the interest rate in selecting a loan not the best indicator? First off, the interest rate is always important. It determines the size of your loan payments.

There are, however, other considerations which may lead a borrower to not select the loan with the lowest interest rate.

Flexibility

A lender who is willing to structure the terms of a loan more favorably from the borrower’s perspective may be offering a more attractive deal than a competing loan with a lower interest rate and more stringent terms.

Experience

A banker who understands the nuances of your company’s industry and has contacts within the industry may make a loan at a higher interest rate worth it. In addition, if you are considering a potential sale of your business a lender experienced in such transactions may make for a much smoother transaction.

Turnaround

Often it is crucial to have expedited access to borrowed funds. A lender who can process your loan within a short period of time may be your best option.

Relationship

Does the prospective lender have a significant interest in obtaining your business due to their size or their desire to enter a new industry? This may afford you the opportunity to establish a relationship and eventually obtain more favorable terms, including a lower interest rate in the future for your borrowing needs.

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See Also:
What is Compound Interest
Effective Rate of Interest Calculation
Interest Expense
Nominal Interest Rate
Interest Rate Swaps

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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

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!”

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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Term Loan

See Also:
What is a Term Sheet?
Term Deposit
Terms of Sale
Below the Line
Lease Term

Term Loan Definition

A term loan, defined as a loan which exist for a specific, predetermined amount of time before it is called and requires payment, is a staple in the loan industry. A term loan contract defines the period of time when the loan must be repaid. The agreement for this is negotiated and signed by both lender and receiver.

Term Loan Explanation

A term loan, explained as a loan that exists for only a certain period of time, is one of the many types of financing for a business. Most loans, regardless of type, have some sort of time when they are expected to be repaid. A term loan agreement, in comparison, establishes the period which the loan remains open as part of the agreement. There are both short term and long term loans. Short term means less than 1 year. Long term, on the other hand, means greater than 1 year. These loans maintain interest, principle payments, fees, and other requirements just as non-term loans do.

Example

For example, Kevin has started an A/C and heating company. He has worked to the bone to establish his company. He has gained accounts receivable, clients, some assets, and quality employees. Now Kevin must continue to grow his business. To do this, he needs financing.

Kevin has evaluated his options and now sees a term loan as his best financing opportunity. He makes sure to know what he wants and expects from the loan before he schedules a meeting with agents. Kevin will plan now rather than paying later.

When Kevin meets with the bank they negotiate an interest rate, principal payment schedule, and other details. With this he also negotiates a term loan amortization schedule. He decides on 5 years; ample time to repay. He also arranges for no penalty for early repayment to Kevin has flexibility in his loan. He leaves the meeting confident that he has made a good situation for his business.

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Sinking Fund

Define sinking fund as an accumulation of assets set aside to repay a loan when it becomes due. Use the accumulated amount to pay off the debt early to reduce the amount of liability for a company.

Sinking Fund Meaning

Use the sinking fund to retire debt or set aside amounts to pay off the debt as it comes due. This means that a sinking fund’s only purpose is the payment of that obligation and nothing else. The assets set aside however may be set aside with the assumption that they will grow over time within the sinking funds account. At times there are sinking funds provisions within most loan agreements. A sinking funds provision often allows for discounted payment of debt. Often times the provision does not account for the entire amount in the loan which will last until maturity. The most common forms of instruments associated with sinking funds are callable bonds or other other option stocks.

sinking fund

See Also:
How important is personal credit in negotiating a commercial loan?
Loan Agreement
Payment Terms
Down Payment
Self-Liquidating Loans

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