9 Questions to Ask a Small Business Lender
Sure, plenty of banks offer small business loans, but not all banks truly specialize in providing loans and services to small businesses. Go shopping for a small business lender and you'll soon realize banks vary in terms of the industries they're familiar with as well as the size of business they are willing to finance. If your business is poised for growth, one thing's clear: You're going to want to have a reliable banker at an institution that has appropriate funds available, as well as the right expertise in-house to help you grow.
How do you know if the banker you're talking with is really the best choice to work with your business?
One thing to realize as you're sitting down with a financial expert is that, well, you aren't one. "Most entrepreneurs are enthusiastic risk-takers," says Bob Seiwert, a senior vice president of the American Bankers Association who has 30 years of small-business banking experience. Taking a loan may seem natural, especially when your cash flow projections support prompt repayment. But debt financing is an occasion for cautiousness, and a banker can be the voice of reason to help you mitigate loan risk.
"The time to figure out alternative ways to get a loan repaid is at the time a loan is being considered, not once it is in trouble, Seiwert says. "Business owners should work with their banker to decide what will happen if a loan doesn't go as planned."
That said, you can as a business owner, go a long way toward impressing a bank – which, in turn, can go a long way toward helping you establish a loan and healthy terms of the funding. Come into a meeting prepared: Arm yourself with financial statements as well as pro-forma projections so the bank can get an idea of where your business is going. Seiwert suggests including no only the rosiest scenario, but the most-likely case—and a worst-case projection. "The banker will see, Ahh, this business owner really has their ducks in order," he says.
What follows is a list of questions to ask a potential lender, and topics to go over. As Seiwert says: "If the banker is not having these discussions with you, or you're not engaged in this way, move on to the next bank. You want a bank set up in structure to weather all economic cycles."
1. Is the bank really prepared to meet your lending needs?
"If I needed money today, would it be available to me and my business?" is a question every business owner should ask his or her lender. More than 70 percent of the small businesses in the United States have not requested credit from their banker in the past 12 months, Seiwert says, which means there's likely a backlog of small businesses that wil be seeking additional credit as the economy improves. You need to make sure your bank has the resources to finance not just your business, but many others.
2. Does the bank have any questions about your character?
Any smart banker will examine your character as a client in order to answer the question: "If the borrower has the money to repay the loan, will they?" In this economy, it's particularly prudent for a lender to know that if a borrower gets in trouble, he or she will work with a bank to repay debt rather than running from it. "Banking is a business of trust. And if I can't trust you, I don't care how good of financials you have, but I'm not going to make you that loan," Seiwert says. So what can you do to show a bank that you're trustworthy? Establish a consistent repayment history, a solid credit history, and compelling references. And be prepared to give names of key customers and suppliers who can testify to your trustworthiness.
3. Does the bank understand your reason for borrowing?
Some banks won't lend to casinos; others do not fund restaurant ventures or acquisition loans. You want to make sure you bank knows what business you're in and why you need more money. It's a mistake to not be precise when talking to your banker about a possible loan. Don't just say you need money to make payroll. "Yes, that's what you're going to use the money for, but what actually happened to cause the cash shortage?" Seiwert said.
4. Is the amount you're asking for reasonable?
You don't want to find yourself in a situation where you've borrowed enough to get yourself in debt, but not enough to finance your company's most promising growth opportunities. Made sure you and your bank know how much money it will take to implement your business plan. If you're buying a flower shop, for example, you might not only need money to purchase the business, but also to finance new inventory down the road. Your banker should go over your future needs with you.
5. What's your cash position?
The primary source of repayment is always cash flow from your business. So, your banker should want more specifics, and you should be able to provide them.
6. What are the risks to loan repayment?
There are financial risks that vary by industry, company size, and company structure. Your banker should help you pinpoint the risks you face and assess where you stand. How much current debt does your business have? How vulnerable is your industry to the business cycle? Are changes in technology something that could disrupt your ability to make money? "What you as a business owner don't want to do is marry high financial risk with high business risk," Seiwert says.
7. Can these risks be mitigated without adding tough terms to your loan covenant?
Once you've figured out what the risks are to repayment, you can work with your banker to mitigate them. Usually, Seiwert says, this part of the conversation will boil down to adding on collateral and guarantees as terms of your loan. Ask your banker for ways to avoid placing an undue financial burden on you in the event your business fails.
8. Do you think my company's financials are strong?
As a business owner, you've probably provided your bank a lot of financial information. But how solid is this data? "A lot of business owners come in with the financial information scratched on the back of an envelope," Seiwert said. The banker is going to look at the quality of your records, whether you work with a seasoned CPA, and if your financial documents suggest a level of sophistication that is attractive in a borrower. A full fiscal review or forecast is a step up from basic accounting data in bankers' eyes, and an audit from a good accounting firm will further establish your credibility. And remember, not all accountants are created equal in the eyes of bankers. Find a good one.
9. Do you trust me?
Cultivate a reputation for forthrightness and honesty with your banker. "If I'm sitting down with you, I'm going to get a good feel for who you are, and whether you're telling the truth," Seiwert says. "A lot of small business owners love to share their successes, but they don't like to share when times are not so good. Really, that's the time when they need the most advice. And that gets back to character and trust. I have to get the feel that you're going to tell me the whole scoop – the good the bad and the ugly – for me to lend to you."
CHRISTINE LAGORIO-CHAFKIN | Staff Writer | Senior Writer
Christine Lagorio-Chafkin is a writer, editor, and reporter whose work has appeared in The New York Times, The Washington Post, The San Francisco Chronicle, The Village Voice, and The Believer, among other publications. She is a senior writer at Inc.