The two elements that define the term “deleveraging” are: stop borrowing and pay off what you owe as soon as possible.
During the period I call “The Lost Decade” — 2009-2016 — this practice was an essential survival fundamental for millions of small businesses. Indeed, across Main Street America, survey after survey since 2009 revealed small business owners reporting emphatically that they neither wanted nor needed a business loan.
Even during the past two years, as economic expansion has finally taken hold, polling has indicated most small businesses have funded growth with their own retained earnings which, by definition, is a product of deleveraging. But as the economy continues to grow, organic capital eventually runs out. And if you’re going to take advantage of sustained expansion opportunity, funding for most small businesses means, ultimately, a bank loan.
The good news is banks are standing by, ready to lend. Especially community banks, of which I’m an unapologetic, unabashed champion. The other news is that since it’s probably been a while since you’ve approached a bank for a loan, it’s probably time to brush up on some of the fundamentals of having a successful banking relationship.
Consequently, I’m going help you get back up to speed on six key questions you need to answer. We’ll cover three this week and the rest next week.
1. Who decides?
You have the right to ask who is going to make the decision on your loan. Can your loan officer decide, or will it go to the local loan committee or somewhere else? Why do you care? The more people involved in the loan approval process increases the scrutiny of your deal, which means more questions and more time to get an answer to your loan request. In the latter case, budget more time and more patience.
2. What do they need?
Your banker will ask for personal and business financial information. They might accept last year’s business numbers, but they could also ask for interim financial records: balance sheet and operating statement (aka, profit and loss statement). They’ll also want to see a projection showing how your plan to pay the money back will impact your cash flow. Depending on the size of your request and what you’re using the money for, they may ask for a business plan. If the loan is for real estate, a current appraisal will be required.
Don’t give the bank more than they ask for, but give them everything they ask for. Remember, the quicker your banker gets the information, the quicker you’ll get an answer.
3. How do they want it?
Ask your banker what information can be presented verbally and what needs to be in writing, whether hard copy or electronic. Whether you’re borrowing $5000 for a computer, or $5 million to buy out a competitor, knowing as much as you can about the loan approval process will significantly improve your chances of not only getting a quick answer, but also getting an approval.
Finally, the title of the shortest book in the world is, “Loan Officer Courage.” But you can give your banker courage with responsive communication and proper information.
Next time, Part Two: What motivates your banker?
Write this on a rock … Don’t just borrow money from your bank — make your bank your business’s best friend.