Small business loans can be used for a variety of purposes. For example, a business loan can help you buy a business, start a new business, and expand your business. You will deal directly with the banks loan officers but make no mistake major small business loans are reviewed by loan committees. Loan officers are typically not part of the loan committees.
Understand the Role of Loan Officers, Loan Committees & You
Improving the odds of getting a business loan at the terms you want starts with understanding how a business loan is processed and approved. Understanding your role and that of your loan officer and loan committee will help you through the approval process. It is a team game, and as they say, there is no I in TEAM.
Preparing to make a Small Business Loan Application
Remember, from a banker’s perspective past financial performance, including loan repayment history is very predictive of future financial performance. Before approving your loan request the loan officer’s job is to document this information referred to as the “due diligence” process. The loan officer will then calculate the critical financial performance ratios for the time period your financing or business plan covers. Then they compare your ratios to that of similar companies in your industry.
I highly recommend that before you start to talk to your commercial loan officer or apply for a small business loan do some preparation:
Bookkeeping: bring your bookkeeping up-to-date.
Financial Statements: review your financial statements with your accountant. Ask him/her to explain the financial ratios from your financial statements and the implications borrowing money will have on the financial health of your business.
Business Plan: write a business plan that includes full proforma financial projections.
After the Loan Application
After your application has been submitted, your loan officer begins building a business case for your loan request. This will contain information about your business and financial condition. It will also contain information about:
• the ownership of your business
• banking activity.
• previous borrowing experience.
• information from third-party credit reporting agencies.
• It may also contain anecdotal information from your customers, competitors or suppliers, if they happen to have a relationship with the same commercial finance organization.
Unseen Decision Makers
Most larger small business loan decisions are made by people who remain unseen by the borrower. Commercial loan officers are provided with authority to approve loans up to a certain level. Some can approve small loans of 50,000, 100,000; however, most loans over 250,000 are normally approved by a committee. Some loans over 1 million may require the approval of the board of directors.
The Loan Committee
Loan committees can have a wide range of authority. Most have little or no authority for granting loans; however, the function of those committees are to weed out loan requests before the requests are seen by senior management. Others have loan committees that have authority to grant small business loans up to the legal limit of the bank.
Most lending institutions have a relatively formal committee and decision making process for processing commercial loans. Depending on the type of financial institution, your loan may be required to be submitted to a loan committee for approval.
Other banks and lending organizations provide a fairly wide scope of authority for loan officers to approve or disapprove most of the loans they handle. However, in those types of institutions the committee’s review the loans after they’ve been made.
Depending on the size of the bank and structure, the annual report may tell which directors serve on which loan committees. You may also ask your loan officer for the names and identities of the committee members that sit on the loan committee that will be processing your loan request.
The Loan Officer’s Role
Your loan officer knows you and your business the best. He/she will also have a good feel for:
• What type of loan may or may not be approved.
• The types of loans
• The terms under which loans can be granted.
Some loan officers are more like advocates who aggressively package, defend and represent your loan request to the committee. Pay attention to any feedback and suggestions your loan officer provides regarding structure, information, collateral and guarantees that will be required. Remember, your loan officer knows the rules and the organization’s policies and procedures.
Plan Ahead - Write A Business Plan
Do not make a last-minute request for financing. Waiting until the last minute to prepare a business plan or request for financing can hurt your chances for approval, especially if you don’t have all the right information needed to make a decision. You need to allow the bank or lending institution plenty of time to go through its own procedures. There is paper work, analysis of your financial statements, credit checks, etc.
It’s important to have good financial management and control of your business. One of the ways you can show this is by taking the time to make a proper presentation by writing a business plan. It is most common to present your loan request with a business plan detailing your vision, situation and finance needs. In rare cases you may be able to present an executive summary with copies of your last three years financial statements - this happens very rarely, depending on the loan officers experience and bank policy.
Work With The System
Many entrepreneurs and business people have the perception that banks and commercial lenders do not like to lend money to a small business. Nothing could be further from the truth. They are in business to make loans — profitable loans.
Don’t fight them, think of them as partners. Talk to your loan officer to learn as much as you can about the approval process. Talk to other entrepreneurs and small business owners who may have dealt with the organization previously. They may have insights about how the organization works and functions.
Think of your relationship with the loan officer this way:
• Commercial lender: the lending institution is really an information gathering system. You have to provide assurance to the bank or lending institution that you have the capacity to repay the loan as planned.
• Borrower: think of your role as the information provider. Provide them with quality information. It will help them make a decision about your loan request and help you get the money want, at the terms you want.
Eliminate the tug-of-war and work closely with your loan officer — you will be pleased with the results. Make sure you know how to write a business plan.