By Ed McLaughlin and Wyn Lydecker
A recent headline in The New York Times claimed “Small Businesses Are Finding Bank Loans Easier to Come By.” With interest rates low and the economy coming back, bankers and small business experts are saying this is a good time to get a small business loan. Large banks approved 20% of small business loans this past June, versus approving only 9% last June, according to the Times article. As balance sheets and cash flows improve for individuals and their businesses, banks are more willing to lend. That means it’s also smart to get banks to compete for the right to lend you the money you need.
The article profiled Jake Fitzsimmons and Tiffany Helton who had decided to expand their two successful Stuft Burger Bar restaurants to an additional location. They had opened their first two restaurants without the help of a bank. This time they wanted to take out a loan. But before they started filling out loan applications from their own bank, the director of the East Colorado Small Business Development Center, Richard Pickett, counseled Fitzsimmons to ask several banks to bid on the opportunity to lend them the money to expand. Soon Fitzsimmons and Helton had three bids from three different banks. They took the one with the best loan terms.
I had a similar experience when counseling the owner of a local gym who needed a loan to expand to a second location. I told him to approach several banks beyond the one where he had a relationship. Before long, he, too, had banks competing for his business, and was able to negotiate better terms as a result.
Despite the improving economy, banks still do want your business to have assets, collateral, and/or a track record of success with plenty of cash flow to cover the loan payments. The bankers will look at your entire financial picture and often the collateral they require will include your personal savings or your house. Lack of collateral can still make a bank turn you down for a loan.
Two years ago Wyn was advising another small business that had been in business for 10 years. They earned consistent profits and had positive cash flow. Yet, their bank, where they had done business for years, first gave then a form that asked for a list of personal assets and other sources of income. After speaking with the loan officer, the owners were able to get the bank to give them a form simply requiring three years of past financial statements for the business. They also had to submit tax returns for the past two years.
If you approach your bank for a loan and find that they are demanding too much paperwork, too much collateral, or terms that are not to your liking, try going to another bank to compare offers. Let the banks know you are shopping around. If you get turned down or do not like the terms, then try alternate lending sources, such as a local economic development fund. In any case, be aware that you can make competitive forces in the lending market work for you.
What has been your experience in seeking a small business loan? Have you been able to negotiate better rates or reduce the requirement for collateral? Share your experience in the comments.
Ed McLaughlin is currently co-writing the book “The Purpose Is Profit: Secrets of a Successful Entrepreneur from Startup to Exit” with Wyn Lydecker and Paul McLaughlin.
Copyright © 2014 by Ed McLaughlin All rights reserved.