Thursday, December 16, 2010

Small Business Lending: What the Bankers Want You to Know

What types of small businesses are best positioned to get loans today?

Not surprisingly, banks now have to be extra diligent about their lending practices, as many small businesses have recently felt. Sometimes that feels like it means "no more lending, period." However, banks as well as the governments are strongly supporting lending to small businesses.

What types of companies have the best shot at getting a loan?

• Companies that have been in business three years or more.
• Companies that operate in a B2B environment--selling to other businesses rather than to consumers.
• Companies that can also demonstrate a strong personal credit history.
• Companies that are selling to the governments -- government contractors with more than just one contract.

For companies that have less than three years' experience, exceptions can be made. For example, companies that are "professional groups"--such as accountants, doctors, dentists, lawyers, or industry experts--are often exempt.

What types of small businesses will have a harder time getting a loan today?

Not surprisingly, companies that are in cash businesses. Retail, for example will have a harder time getting a new loan. Banks are still weary of the consumers' spending behaviors--something we can all relate to! It bears repeating that there are exceptions, and companies that can demonstrate a strong personal credit history, self-invested positions, and succession planning will have a better shot at getting a loan, even if they are not in the best positioned category.

What documents are required to get a small business loan?

The best thing a small business can do is to always keep its finances in order so they don't have to scramble to put them together when cash becomes tight. A bank will always ask you for the following documents, at a minimum. Best to have them ready!

• Business and personal tax returns
• Business financial statements
• Personal financial statements


11 Points to Consider – most requests for bank finance are turned down not because clients are poor credit risk but because they have approached their bank ill-prepared. Get ahead by communicating the right information the first time:

CASH FLOW

Provide data that shows you understand and can manage your working capital (debtors, creditors and stock) and that the cash in your business is sufficient to cover the bank's interest (as well as other key costs such as tax, dividends and replacement capital). "Cash is king" and even profitable businesses can fail if cash is not managed. Understand your cash movements and you may even need to borrow less.

OUTLOOK

Present forecasts which communicate the amount required, payback period, risk and return to the bank. Figures should be more sophisticated than forecast sales and profit and should ideally show the relationship between profits, your balance sheet and cash flows. Sensitivity analysis is important to help the bank understand when they risk non-repayment. Forecasts should always be based upon the most up to date actual data.

MARKETS

Explain your market. Focus 20% of your efforts explaining what has happened and 80% on what you expect to happen and why. Do not worry, top economists sometimes get this wrong too. The point is you need to show the bank you have thought about it, considered the likely outcomes and that you have a clear action plan.

MIX AND QUALITY OF CLIENTS

Detail clients by name/industry/region/contract length. The strength of your clients and their ability to pay = the strength of your business. Building your business around one client is high business risk.

UPDATE

Give the bank up to date management information especially if annual accounts are dated. Information should be produced at least quarterly, split into division/region and include profit, balance sheet and cash flow breakdowns. Management information should be used to update forecast/budget data and any differences should be explained.

NEED FOR LIQUIDITY

Show the bank that your business is liquid and can survive. Tell them how quickly you get your hands on the cash and know your debt maturities, credit terms and what cash is tied up in assets. Think beyond a simple current assets/current liabilities ratio and consider your ideal liquidity position. Remember too much liquidity means assets could be generating a higher return elsewhere.

INCOME

Know your financial definitions. Are you talking about gross profit, operating profit, net profit or EBITDA (earnings before interest tax, depreciation and amortization)? All are common in the financial analysis of businesses. Also ensure you can discuss the seasonality and cyclicality of your industry.

COMPETITION

Tell the bank how you have you performed in comparison to your competitors? Be prepared to discuss your competitors' strengths and weaknesses. This provides confidence that you are a proactive management team that really understands the business.
ACTIVITIES

Break your business down by activity/division and tell the bank which activities are performing well and which are a cash drain and why. Explain how divisions complement or overlap each other and the strategy for each. Be ready with forecasts if necessary.

TRACK RECORD

Unless starting up, provide at least 3 years accounts to a bank (5 years ideally if approaching a new bank) and up to date management accounts. A bank will need this data for the financial analysis of the trends in ratios and margins. It will also give them confidence in your management track record.

EQUITY, DEBT AND THE BALANCE SHEET

Communicate your risk (equity/directors' loans) versus the risk to the bank. Know the real strength of your balance sheet by having current market values of assets to hand and full details of debt (including off-balance sheet exposure such as leases and guarantees). Be clear at the outset what security is and is not on offer.

What are the biggest trends in small business lending?

Two of the biggest trends that this local bank has seen are:

1) Individuals leaving big companies such as law firms, consulting firms, etc. to start their own government-contracting companies.

2) Small businesses that wait too long before calling on the banks for a loan.

Ask your local Banker about EXIM Bank guarantees

Exim Bank’s guarantee of a lender’s loan to an international buyer is generally used for financing purchases of U.S. capital equipment and services. Financing may also be available for: Refurbished equipment Software Certain banking and legal fees Certain local costs and expenses

Exim Bank can do business in most markets. However, they may be limited or unable to offer financing in certain countries and under certain terms. Your lender will help guide you through the Country Limitation.

What you need to complete your applications:

Three years of audited financial statements: Financials include Balance Sheet, Profit and Loss, and a statement of cash flows. A summary of significant accounting principles should accompany the financials. It is not necessary, but highly recommended that financial statements are in English, converted to US Dollars showing the conversion rate. If the financials are more than 6 months old, interim financial statements will be requested.

Local bank guarantee: In many markets, it is advisable, and sometimes required to have a local bank guarantee the repayment of the loan. If necessary, Exim Bank may ask for a letter from your local bank agreeing to guarantee the loan, and the maximum amount your bank is willing to guarantee.

Terms of sale: Exim Bank will request copies of the sales contract/purchase orders/pro-forma invoices (whichever apply to the transaction). This evidences that the buyer and seller agree upon the terms of sale and will give us the basis to determine terms of the loan.

Description of end use of the goods: Will the equipment be used by the borrower in their country or will it be sold somewhere else? Please describe your project, your customers and any other companies or organizations involved in this transaction.

Other support: Is any other US or international development agency providing support for this deal? If so, describe a little bit about it.

15% Down payment: All buyers will need to pay 15% of the contract price up front or arrange for financing outside of the Exim Guarantee.

Exposure Fees: Please be aware that Exim Bank needs to charge an exposure fee outside of any Banks interest or fees. Exposure fees can be as much as 7% of the entire financed amount. Please be aware of this when considering your business plan.

Approximate timeline: Exim Bank would like to know a bit more about the shipping information and approximate dates. Will there be one shipment or multiple? Ask your local Banker about Exim backed loans. It may be just what you’re looking for. In Conclusion……… A strong relationship with a Banker can also drive better lending. Banks are going to be more likely to lend to customers that they know and who have an established record of banking with them, even if that customer doesn't meet the "best positioned" profile.

Article by Jon Marco, Norland International.  For more information about Norland bottled water systems and financing your bottled water project, contact Norland International.