What Makes Lenders Say Yes

For many of you reading this, the mere mention of bank financing puts this article in the "not fun" category. We entrepreneurs like to think of big ideas, plan market takeovers and create things. We don't like to sit through meetings where we have to prove ourselves to get the money we need to do what we do best.

Bank financing is not as exciting as venture financing, where big ideas get rewarded with big bets--which explains why the latter gets so much more ink. However, debt financing is the reality for most entrepreneurs who seek outside funding. And given the volatile nature of the market and economy, it's important to explore what's working for entrepreneurs seeking bank financing today.

Banks today are reeling from the mortgage crisis, and that affects small business lending. With interest rates low and favorable to entrepreneurs, it's ironic that banks are increasingly wary of making loans to them. Not only do banks scrutinize deals more heavily, they also tend to lend fewer dollars. That leaves an entrepreneur considering growth financing deciding whether to try for a loan, wait it out or forget it.

To answer this question, I spoke with Jim Curry, a senior vice president with Washington FIRST Bank, a community bank in Washington, DC. Community banks offer an alternative to the banking giants and are often considered more welcoming to entrepreneurs. Curry considers community banks especially advantageous for business borrowers today because the subprime lending crisis that affected so many larger institutions hasn't touched most of them. So community banks can keep their loan operations consistent, unlike bigger banks that have to manage risk to a greater degree.

Curry's take on the current lending environment for entrepreneurs has bankers deciding whether to lend based on the same principals as before--business profitability, management credibility and collateral. And the dynamics within each of these principals have changed.

Business Profitability
Banks are all about mitigating risk, and the most obvious way to do that is to finance businesses that have a proven track record. Curry offers two pieces of advice:

• Establish two or more years of consistent profitability. Banks want to see that you know how to make money and can cover your loan with your business operations. The longer you've been successful, the easier it will be.
   
• Find a lender who knows the small-business market. If you don't have two years of continuous profits, all is not lost if some of the other pieces are in place. Find a lender who knows your market and can suggest multiple approaches. Curry advises that an SBA loan may be one avenue to pursue.

Credibility of the Management
Banks want to feel comfortable that the entrepreneur has the skills to carry the company forward--after all, they're betting on you. Be professional; treat the bank as you would a valued customer. According to Curry, here's how banks determine a credible team:

• Experience. Show your banker you know how to succeed. Prepare a professional résumé or list of your qualifications. If you are a newer entrepreneur, illustrate your expertise in the market. For example, if you've been an engineer for 15 years and have run an engineering firm for less than two years, be sure the bank knows your full story.
   
• Commitment. Banks like to see that their clients have "skin in the game." It could be a personal commitment, such as sticking by the business through good and bad, or a financial one, such as personally financing the business until now. Once the bank lends money, you are in it together. Demonstrate what you'll do to hold up your end.

Collateral
Collateral is the highest hurdle for many entrepreneurs, as many of us try to keep our personal assets separate from our business. I had a conversation with a group of CEOs seven years ago, and the dismal market had me thinking about getting a loan to cover potential receivables lags in my professional services firm.

Amid much encouragement to get the loan, the most seasoned CEO in the group offered his wisdom: "Businesses come and go every day, and you'll either make it or you won't. It's another thing entirely to lose your house over it." I decided to forego the loan.

Still, banks need collateral--and for the vast majority of us, that comes in the form of a personal guarantee. At its best, that weeds out those who truly need the capital to operate or grow from those who just want a cushion (like me). It's also the ultimate form of commitment for the bank.

If you are spending a great deal of time trying to find something "safe" to use as collateral, make sure your reaction is rational rather than emotional. For proven entrepreneurs, collateral may be just another layer of risk, and one you have a track record of managing successfully. Remember that banks want the loan to be paid back. It's far easier for them to work with you to ensure that.

The collateral options on the table typically are:

• Personal guarantees. In this scenario, the bank secures the loan against your personal assets, which may be your bank account (if you have the resources) or your home. Whatever the collateral used, in the end, your full assets are usually at stake to make sure it's repaid. Compared with a few years ago, many banks want a heightened level of coverage.
   
• Receivables. Depending on the size of the loan, businesses can sometimes get loans against their accounts receivable. Many factors go into this calculation, such as type of client, industry and history. (Government contracts are often the best collateral for this.)

  Curry cautions that in today's lending environment, banks are more stringent about what they will accept as collateral. For example, it's standard not to accept as collateral any accounts receivable that are 90 days past due. Now, however, many banks will only accept as collateral clients who have never had any amounts past due 90 days. The net result is that you can expect to finance less against receivables.

• Real estate. If your business owns an office building or other real estate, it may be an excellent source of collateral. If you've built up equity, your second home or other real estate holding also might be a good source.

If you're not seeking funding today--good for you. The best time to begin is before you need the money. Get educated on the process so you can position your company (and yourself) for success when the time is right.

As you do so, don't overlook the importance of the relationship with your banker. Along with everything else in your business life, your network counts. You want your banker to believe in you and be willing to shepherd your cause. Many of the variables outlined above--such as demonstrating credibility and commitment--are far easier to do within a collegial relationship. Make relationships today that will pay off tomorrow.

For those considering financing in the near future, take heart. There are low, long-term, fixed rate loans out there for entrepreneurs.

Says Curry, "I have very aggressive goals this year in terms of putting money out. We are well ahead of pace."