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How Small Businesses Can Increase Their Ability To Qualify For A Loan In Today’s Market
by Glenn Gray President and Chief Executive Officer
There are a few “rumors” going around regarding small business lending which bear fact checking.
Rumor: Big banks are bad, and small banks are good.
Fact: Size is not the issue. The issue is the safety and stability of a bank. Some banks are currently in a good financial condition, while others are not. Some banks are currently able to lend because they have received TARP funds; while other banks, such as Sunwest, which did not accept TARP funds, are still able to lend because they stayed true to their credit discipline and did not make speculative loans with loose terms just for the sake of achieving short-term gains.
Rumor: We are in a credit crisis, and therefore banks are not lending.
Fact: Yes, and no. We are in a credit crisis thanks to the greed of lenders, borrowers and Wall Street, and a disastrous interest rate policy promoted by the previous administration of the Federal Reserve. However, despite the credit crisis, some banks are still lending – for the right reasons. There are two reasons businesses require capital. The first is to fund growth, which remains a legitimate reason for banks to lend. The second is to fund losses, which is the role of equity, not debt. Even in the midst of a downturn, some businesses grow and thrive. In fact, great fortunes have been made during times of economic turmoil. At Sunwest, we want to fund growth, and we are continuing to find and lend to businesses that are growing.
Rumor: Lending standards are the tightest they’ve ever been.
Fact: Many banks have tightened their lending standards, whereas some banks have not needed to change their standards because they remained prudent during the period of unreasonable practices.Many banks have turned back the clock to a time before lending became too easy, and in some cases sloppy. Today’s lending standards are more similar to those in practice 10 years ago when loans were done as they should be; based on a serious examination of the prospective borrower’s ability to use the loan wisely and make its payments on time. Today’s standards are simply more rationale than they were two years ago.
Rumor: If a business doesn’t have a perfect track record, no bank will even think of lending to it.
Fact: Bad things can happen to good businesses; that does not make them un-bankable. What is equally important to understanding what happened, is gaining an understanding of how a company dealt with issues, how they faced their challenges. We like to know if the company anticipated the challenge; what they did when they realized it was coming – did they adjust? Did they diversify? Did they have a Plan B? We currently have a client that is a great example of a company that had a serious problem and came back stronger. Shortly after the CEO and his business partner bought the firm the company lost a huge client. Fortunately the company was not over-leveraged. They recovered by scaling back internally, diversifying their client base and using strong financial discipline (i.e. not wasting money). They postponed their plans to borrower because they knew they would not be an ideal candidate for a loan at that moment, they would need to follow their Plan B. Once they recovered from their troubled position, they presented their new business plan to eleven banks that competed for their business. Sunwest Bank was selected because our loan officers listened and took the time to understand the nuisances of their business. Today, our customer is a conservative user of credit, has a well diversified customer base, has added manufacturing capacity to serve many more customers and they continue with their excellent financial reporting. This client is also a good partner with the bank because they share their strategic plans with the bank, so that there are no surprises, and we can help fund their growth.
Rumor: As long as my business shows a profit, banks will lend to me.
Fact: Beyond just the bottom-line, bankers should want to know how it was achieved and if it is sustainable. Spending a little more money for good financial accounting is a wise investment in a company’s future. To be bankable, a firm should live within its means and resist pulling out all profits at the end of the year. By being sensible about expenses and distributions, a company can keep part of its profit within the company and build a net worth for the organization, thus making the company more bankable and a good candidate for a loan should they need one.Also, having a clear business plan is important, whether it is written or just oral. In either case, in order for a bank to understand a company’s business plan, and therefore judge if a loan should be made, the company executives should be able to clearly spell out where they are, where they are going, and how they intend to get there.Just as Sunwest Bank avoided the negative behavior that is damaging the banking industry by being sensible in our business approach, we seek to lend to companies that are clear in their thinking.
Rumor: If a bank passed the Stress Test, or wasn’t even tested, they must be a good bank.
Fact: The Stress Test was hardly stressful, and it was only applied to a handful of the largest banks in the country. Similar to banks conducting due diligence on its clients, bank clients and prospective clients should conduct due diligence on their bank or prospective bank. Bank customers should not just take bank ads or sales pitches at face value; they should learn about the bank they may select.Luckily, the financial statements (aka Call Reports) for all banks are a matter of public record and can be found through the FDIC’s Web site. Therefore, bank clients can check out any bank to review its balance sheet, profitability, liquidity and other important factors to help determine if the bank will still be there when the client is ready to tap into its line of credit, get another loan or just know that its deposits are safe.Successful banks ask prospective borrowers good questions. Likewise, prospective borrowers should ask their banker good questions. If the calling officer cannot answer those questions, the borrower should continue to move up the ladder of the bank until the questions are answered to the borrower’s satisfaction. And if the bank isn’t answering the tough questions, or the top executives are unreachable, then that, itself, is an answer.
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