Submitted by: Regions Bank
From the Birmingham Business Journal, October 28, 2011
(Story Image: http://www.bizjournals.com/birmingham/print-edition/2011/10/28/lending-lessons.html?s=image_gallery&img_no=0)
What every small business owner should know before applying for a loan
Dr. John Poczatek works on Zack Blackwell’s teeth at McCalla Dental. Poczatek recently secured a small business loan to expand his practice.
About two years ago, Dr. John Poczatek began planning for a larger office space than the 1,400-square-foot facility he and one other dentist had occupied since late 2005. The expansion would allow two new dentists to join his practice, McCalla Dental.
He needed a small business loan, but after inquiries to a handful of banks, he’d received only limited responses.
Poczatek said he quickly realized lenders didn’t just want to know about his plan as a concept, but to view concrete figures showing how a loan would help his business. They also wanted documents that outlined the size, scope and cost of the project and a complete financial picture of his practice.
Once he had an architectural rendering of new office space prepared by an architect, with four construction bids and a detailed construction cost estimate, a three-year projection of the positive financial impact the expansion would have on his practice and a real estate contract contingent on his loan’s approval, he got the loan.
Poczatek chose Regions Bank as his lender and met their criteria for a seven-figure Small Business Administration loan, using it for his new 6,500-square-foot location that opened in February 2010. He’s since increased headcount from five to 19 and brought in the two new dentists.
The application process took eight months and reams of paperwork, he said. But his main advice for other small business owners seeking loans comes with the proverbial clarity of hindsight.
“Have numbers of what you’re expecting, not just grand visions,” he said.
Local lenders say having concrete numbers is just one of the tips they offer for small business owners considering a loan for startup costs, expansions or operating capital.
John Collier, business banking relationship manager for Regions, said banks typically ask for a company’s financial history, personal financial information and details addressing the five Cs of credit – character, capital, collateral, conditions and cash flow.
If a company’s conditions have changed significantly, perhaps as a result of the recession, even more information may be required, he said.
An SBA 504 loan helps businesses refinance existing debt via a bank lending up to 90 percent of a loan’s value for real estate purchases, Collier said. Lenders will scrutinize loan requests to ensure the cash flow will be enough to cover the debt’s repayment, so be sure to provide supporting documents.
“We don’t want the customer in a situation where it’s tight or it’s not manageable for them,” he said.
John Bentley, Renasant Bank’s president for north central Alabama, said most banks today require more information than in the past. While a business owner’s assurances of sound liquidity once sufficed, times have changed.
“The bank wants to have proof through a bank statement or a liquidity statement just to confirm that,” he said.
The past three years’ tax returns or year-end financial statements are commonly required, and the most recent interim financial statement for the current year, Bentley said. Depending on the type of loan request, copies of accounts receivable may be requested.
And if inventory is being used as collateral, business owners should be able to provide inventory statements, he said. Banks may also ask for proof of age and value of equipment if it’s being used as collateral, or for real estate as collateral, a recent appraisal from a well-reputed appraiser.
Be prepared to explain why sales are up or down, or any changes in financial performance or position, Bentley said, and to fully explain your industry and your competition.
“The banker may not be an expert in any one industry,” he said.
Paul Rogers, Birmingham area president for Aliant Bank, said communication is crucial. He said a business owner must specifically explain to a lender why the loan is needed and how it will generate additional funds if it can’t be repaid based on historical cash flow.
Select a banking professional who is able to listen to your situation and truly understand the business, Rogers said. With that accomplished, a lender and business owner may decide a loan isn’t the best solution. Other options to explore include equity, money from a personal source or venture capital, which could be used to generate seed money or for expenses providing no immediate boost to cash flow, he said. A loan is best used for adding employees, covering short term needs and purchasing assets.
“The key is to get the best form of capital that helps you accomplish what you’re trying to accomplish,” he said.
If a loan is pursued, Rogers said, prepare to provide proof that vendors are paid on time, an explanation for any past credit score hits and a current personal financial statement listing all assets and debts, including rental property debt or income or investment dividends.
And if a bank asks for only three years of tax returns, consider going a step further.
“Looking at four or five years’ trends may give a better reflection,” Rogers said. “At the end of the day, those financials tell a story, and you want to tell that story the best you can.”