ABA Banking Tips for Small Business Owners

Recently the ABA issued some insight into how to improve your chances at getting a small business loan. Here are some of their suggestions.

1) Get to know bankers at several financial institutions in your community.

Before requesting a loan, find out which financial institutions in your market make loans to firms like yours. Not all banks specialize in business loans. Work with a banker that understands your industry. Not only will they be interested in your business, but they can help by offering insight into the problems and challenges facing your industry. Many times the advice a banker gives is far more important than the product or service they sell. Seek a banker who can give financial advice that will help you survive and thrive in today's economy. In turn, you should reward that banker with your business and your loyalty.

2) Be able to articulate your firm's "value proposition" to its target markets and your business plan to reach them.

If you can't clearly articulate why other companies or customers should do business with you and how you'll effectively compete in your chosen target market segments, you have some work to do. You should sell your banker on why you will be successful.

Develop a business plan that has three different scenarios: best case, most likely case, and worst case. You want the banker to understand all three since you're asking for support through good times and bad. Also, be prepared to discuss in detail the assumptions that underlie each of these scenarios.

3) Think like a banker.

Understand the risks of operating in your industry. Have a plan to mitigate those risks and share it with your banker. Bankers are going to do a risk analysis anyway, so it's important to help them. Most likely, you can provide a perspective that the banker hasn't considered. It's important for the banker to see that you recognize the risks of operating in your industry and that you have a plan for dealing with them.

4) Develop at least two ways to repay the loan.

Bankers look for primary and secondary loan repayment sources. For the sake of your business, you should, too. You are in the best position to determine possible repayment alternatives. Secondary repayment resources could include the pledging of business or personal collateral as well as the addition of a loan guarantee by the firm's owners, suppliers or customers.

The more certainty that the banker has that the loan will be paid "as agreed," the more likely it will be that you not only receive a favorable loan decision, but also the best interest rate. Smart business owners understand that now is the time to think about alternative repayment sources, not when their business gets into trouble.

5) Understand the difference between debt and equity. 

Your banker can lend you money based on the value of collateral pledged and the cash flow the business will generate to repay the loan. They will discount the market value of collateral and lend based on a lesser value. Funds a business needs in excess of the amount that they can reasonably repay with the normal cash of their business and the liquidation of their collateral should be funded with equity, not debt. 

2010-01-19 01:00:00 -0500