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Acquiring business loans means getting back to the basics

For many small business owners, the bank lending process has always been shrouded in mystery. In the middle of the decade, it looked like everyone with a pulse and a business card was credit worthy. Now, it sometimes seems that even the best-run and most profitable businesses are being denied.
The truth, of course, has always been somewhere in between these two extremes. While larger banks have made headlines for their risky loans – primarily in the mortgage area – community banks have been much less affected, and have never really stopped lending.
One thing is for sure. With the economy continuing to slump, many companies are less profitable than they were three years ago, and subsequently, many are less credit-worthy than they used to be. Companies that were profitable in the past may just be getting by in 2009; companies that were just surviving may now be operating in the red; and companies in the red, well, those companies may not be around for much longer.
There are still loan opportunities even for companies navigating the most difficult of financial straits, based on feedback from lenders we work with regularly at Citrin Cooperman & Company, LLP. But these small businesses need to make themselves stand out.
Steve Romaine, President and CEO of Tompkins Financial Corp., parent of Mahopac National Bank, which operates in Westchester County and the lower Hudson Valley, reports that his bank is lending as much as ever and that many local community banks like his are doing the same. Led by Mahopac National Bank, loans grew by $100M in 4th quarter alone at Tompkins Financial Corp.
While Mahopac’s and many other banks’ lending standards are the same as they’ve always been, it’s getting more difficult to lend because the quality of loan applications have deteriorated over the last several months according to bankers with whom we’ve spoken. Companies which received loans in good times – when they were turning a healthy profit – now need to illustrate to their bankers how they plan on paying back the debt in a market that may sink further.
Romaine says business owners should consider the following:
· What’s the value of the collateral being offered to back the loan, and is it worth as much as it was two years ago? Many small business owners use their homes or real estate as collateral, but those values have dropped and may not be enough anymore.
· Lending decisions are about more than numbers and balance sheets. It’s important for companies to "sell" themselves and their ability to pay back the loan. Balance sheets tell bankers that you’ve made money in the past. They need to be reassured that the small business owner has plans to continue making money into the future so you can pay them back.
· If a business is losing money or marketshare, it’s not a death knell for a loan application. It’s particularly helpful if a business owner can explain or demonstrate that they have successfully operated their firm through down economic cycles before. Also be prepared to tell the banker how costs will be trimmed in order to remain a viable business. Explain how the loan will enable the firm to increase revenues.
· Be prepared to go the extra step of explaining how further deterioration in the marketplace would or would not affect the ability to make payments. Include what steps the company will take to cut expenses and still make payments if revenues deteriorate further.
At Citrin Cooperman, we work with small businesses on helping them achieve and maintain profitability, and are often asked what we can do to help business owners be best positioned to acquire capital. Here what we tell our clients:
· Strengthen the company's balance sheet. Lenders like business owners who have their own skin in the game too. So the greater the owner’s equity in the firm, the stronger the company will be perceived.
· Have a strong business plan and forecasts/projections covering the next two years. Make sure it is realistic and be able to defend revenue projections. If 2008 was not as strong as years prior, business owners need to be able to show why and make a compelling presentation as to how it has been fixed.
· Don't rob from the company. Leave profits behind, as it shows the business owner is willing to invest in their company. Banks like to know that a business owner is working for long-term goals.
· Make sure personal credit scores are in good shape. Banks rarely lend without personal guarantees. Work to get credit score up before going to the bank.
Despite how it may sometimes seem, banks want local small businesses to succeed, and are looking for reasons to approve loans. Efficient management, button-downed financial statements, and a plan for the future increase a business owner’s chance for acquiring capital.
About the Author: Alan Badey is a partner at accounting and business consulting firm Citrin Cooperman & Company (www.citrincooperman.com), and leads the firm’s Westchester County office, based in White Plains. He can be contacted at abadey@citrincooperman.com.