Preparing to Borrow from a Bank
A BANK’S DECISION to accept or reject a loan application is based primarily on the borrower’s ability to repay the loan. As a company grows, a clean record of loan payments causes banks to shift gears and place more weight on the business and less on your managerial capability. Although personal assets and individual financial standing remain important, as long as your company is healthy, banks expect it to generate enough cash to repay the loan, and look to you, the owner, and other shareholders only as fallback sources. Each year that a business improves its earnings and cash flow performance, owners and shareholders become further distanced from any repayment obligation. Nevertheless, management ability, personal integrity, and financial stability remain important ingredients for sound bank relations.
Regardless of the financing stage, banks want to see hard facts in addition to these personal attributes. This chapter examines the documentation and supporting evidence necessary to obtain a bank loan.
“The more money you need, the easier it is to get” is a general rule of thumb in the financing game. Naturally, there are exceptions. For example, the Small Business Administration (SBA) has maximum limits beyond which it cannot go. And collateral value must match any size loan. Experience has shown, however, that given the proper collateral, it’s much easier to raise $10 million than $500,000, and it’s easier to raise $500,000 than $50,000. So if you have an option, go for broke, even if you turn around and quickly repay the excess.