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Behind the curtain: Demystifying the business loan approval process

by Mark Lawson, Director of Treasury Management Enterprise Bank & Trust, Member FDIC

The Journey to “Yes”

Every entrepreneur dreams of having more capital. Whether you need to purchase equipment or expand, it can often be the missing ingredient needed for you to be successful. When you arrive at the moment that you need to explore securing capital to fulfill those dreams, be sure you are prepared. We all know banks have a basic loan approval criteria – but what you may not realize is there are a variety of more subjective measures that also come into play. I’ll give you some insight that will help to demystify the subjective part of the equation (a glimpse “behind the curtain”) and help maximize your chances of arriving at a “yes” on your business loan application.

18 Red Flags

1. No Budget

This could be a sign you may be too early in your cycle for your bank to take the risk.

2. Minimal Understanding of Your Numbers

If you have a hard time explaining your finances, it signals that you – and your bank – will be vulnerable should any financial challenges arise.

3. Poor Credit Score or Credit References

As you can imagine, poor credit score is a major predictor of your ability to repay your loan.

4. Interest Rate is Your Primary Concern

“Rate shopping” raises caution – will this business owner be committed to our partnership?

5. Excessive Dependencies

Putting all of your eggs in one basket in any aspect of your business is risky.

6. Instability, High Variability

Operating in an unpredictable business environment (for example, sporadic access to raw materials) is, obviously, risky.

7. Poor Communications

Poor communication may be a sign for your banker of things to come.

8. Turnover Ratios Lengthening

Lengthened turnover ratios such as slow selling inventory, delays in paying suppliers, etc. can worry your banker.

9. No Skin in the Game

Most bankers seek out owners who are truly invested in their business because it shows a certain level of commitment.

10. Responding Piecemeal to Financial Requests

Not being well-organized could reflect how you run your business and is an indicator of how your relationship will work.

11. Growth and Expansion That is Too Fast

Rapid growth can be a mixed bag – while it sounds good on the surface, it could cause major underlying issues.

12. Overall Cash Flow

You may need capital, but if your cash flow is marginal or negative, it could create concerns.

13. No Management Team

There is risk in relying on one founder/owner – well-run businesses have a succession plan and trusted advisors.

14. Overly Complicated Ownership Structure

A banker will question a tangled ownership structure. Clarity and simplicity are important for sound future outcomes.

15. Tax Income is Different than Book Income

If a business owner says they make $200,000 but they operate largely in cash and can only show earnings of $100,000, the bank must use the lower number to calculate risk.

16. Slow to Provide Timely Financial Information

Not being well-organized could reflect how you run your business and work with your financial partners.

17. Fighting or Unrest Between Management, Partners, or Family Members

These situations rarely end well in general, but especially with your lender.

18. No Estate Plan

What happens to your business and stakeholders if you are no longer around?

This list was assembled with the biggest red flags first, on an admittedly subjective continuum. You’ll notice that some obstacles are quite difficult to overcome, but many can be overcome with help. Typically, it is the more subjective criteria that your bank can help you work through, which is why it is important to partner with a bank that looks at more than just your numbers.

The way a business owner manages their personal financial affairs is a window into how they’ll handle their business affairs. Do you pay your bills on time? Do you forecast? Do you have reserves and liquidity?

Sometimes business owners are surprised that their banker views their personal finances, but your personal finances are connected to your business finances, so be ready for those questions.

The most important takeaway of this report is that business loan decisions are both objective and subjective. Basic financial criteria must be met, but overall impressions, work style, and the ability for the bank and business owner to develop a deeper, trust based relationship matters.

The bottom line: a consultative relationship with your bank should be your expectation. Take the time early on to talk openly with your banking advisor. You’ll discover quickly whether they will treat you as a trusted and respected partner, or just a transactional client. Ultimately, it is the ability to effectively partner and work through loan application hurdles that will get you closer to your “yes.”

To learn more about Demystifying the Business Loan Approval Process, download the full white paper, 18 Red Flags That Can Put Your Business Loan at Risk, at www.enterprisebank.com.

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