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Securing a Small Business Loan – Part I: Establishing The Relationship

Posted on March 5th, 2017

Jack Kern
Owner, President
Outsourced Accounting Department, Inc.

At some point, most small businesses owners will visit a bank or other lending institution to borrow money. Understanding what your bank wants, and how to properly approach them, can mean the difference between getting your money for expansion and having to scrape through finding cash from other sources. Unfortunately, many business owners fall victim to several common, but potentially destructive myths regarding financing, such as:

  • Lenders are eager to provide money to small businesses.
  • Banks are willing sources of financing for start-up businesses.
  • When it comes to seeking money, the company speaks for itself.
  • A bank, is a bank, is a bank, and all banks are the same.
  • Banks, especially large ones, do not need and really do not want the business of a small firm.

Understand the basic principles of banking.

It’s vital to present yourself as a trustworthy businessperson, dependable enough to repay borrowed money and demonstrate that you understand the basic principles of banking.

I once had a client who, when I first started working with her, was very frustrated with her banker when she was trying to obtain a loan. I finally said to her, “It doesn’t matter what you think of him. The thing you need to understand is that the only authority he has is to say ‘no.’ If you want him to say ‘yes,’ then you need to play his game and get him all of the information he needs to get your loan approved.”  (If you’re interested in the final outcome of this client engagement, see our Testimonials under “Financial Reporting.”)

In other words, your chances of receiving a loan will greatly improve if you can see your proposal through a banker’s eyes and appreciate the position that they are coming from.  Bank lending officers have a responsibility to obtain the information required for their internal loan approval process (more on this in Part III).  In turn, banks have a responsibility to government regulators, depositors, and the community in which they reside. While a bank’s cautious perspective may be irritating to a small business owner, it is necessary in order to keep the depositors’ money safe, the banking regulators happy, and the economic health of the community growing.

And finally, as I alluded to in my introduction above, know that there are certain types of small business funding scenarios that are simply not “bankable.” An understanding of this fact, and what these scenarios are, can save you a lot of time and aggravation.  I will also discuss this in more detail in Part II.

Build rapport.

Building a favorable climate for a loan request should begin long before the funds are actually needed.  Bankers are essentially conservative people with an overriding concern for minimizing risk. Don’t be offended or annoyed by this, just understand it’s the nature of the regulatory environment in which they work. (After all, why do you keep some of your cash in the bank rather than putting all of it in the stock market?)  So for example, the worst possible time to approach a new bank is when your business is in the throes of a financial crisis. Devote time and effort to building a background of information and goodwill with the bank you choose and get to know the loan officer you will be dealing with early on.

Logic dictates that getting over their aversion to risk is best accomplished by limiting loans to businesses they know and trust. One way to build rapport and establish trust is to take out small loans, repay them on schedule, and meet all requirements of the loan agreement in both letter and spirit. By doing so, you gain the bankers trust and loyalty, and he or she will consider your business a valued customer and make it easier for you to obtain future financing.

The advice and experience of an accounting professional is invaluable. Don’t be shy about requesting his or her assistance, and an introduction to a lender that is best suited for your particular type of funding need.

In Parts II and III, I will go into more detail on alternative sources of funds, and the loan application process.


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