The Basics of Borrowing
How Small Businesses Can Get the Loans They Need
Throughout Florida, small businesses account for a big part of our economy. But in recent years, the creation and expansion of businesses have been hindered by a lack of readily available loans. Small businesses weren’t the only ones who suffered during this dry spell of capital. The banking community has realized that to generate revenue and attract new customers, lending must once again be a priority.
Now that loans are accessible to small business owners, which lender should they choose and how should they prepare to make a request? Community banks are a good place to start. Unlike large financial institutions – which often rely on insurance, investment and other services to boost their bottom line – most community banks need borrowers to be profitable. And, in addition to their trademark personal attention and helpful customer service, community banks can act as a reliable financial partner for businesses as they plan for the future.
Before applying for a loan, small business owners should first take stock of their financial situation – their funding needs and growth opportunities – to ensure the right amount is borrowed. They also should consider their cash flow and profit timetable to help effectively structure loan repayment. Borrowers must be certain their payment plan is mutually suitable and doesn’t jeopardize the company’s financial stability. For instance, a seasonal business could structure its plan to include interest-only payments during the slow season and larger principal reductions during the peak season.
Next, business owners must consider the loan from the perspective of the bank, which must be comfortable with the borrower’s credit and earning potential to justify lending. Though somewhat overlooked by many financial institutions in recent years, most banks rely on the “Five C’s of Credit” to review a loan request. They include character – the borrower’s willingness to do whatever it takes to repay the loan – which is the most important factor and also the most difficult to measure. Also essential is capital, the business owner’s personal money at stake, and the company’s capacity, or cash flow to support the proposed monthly payments. Businesses must demonstrate collateral, something of liquidation value the bank may sell if the loan is not repaid. And finally, lenders will look closely at the conditions of the market for the borrowing business.
By considering these elements and addressing potential weaknesses before the loan request, business owners will tip the lending odds in their favor. But banks will find many of these factors lacking for emerging or recently established businesses, which often are a risky lending proposition. When starting a new venture or attempting to bolster cash flow for their existing business, entrepreneurs should work with their community bank to explore funding options offered by the Small Business Administration (SBA). SBA loans can help by providing banks with a partial loan guarantee, which protects the lender from assuming all of the liability and allows for more favorable repayment terms. By working with an experienced community banker who has a thorough understanding of the SBA process, borrowers are well-positioned to navigate the SBA’s sometimes complicated requirements and application process.
No matter what type of loan business owners hope to obtain, it’s wise to consult a banker with commercial lending experience.They’re typically willing to provide their input for free for the opportunity to earn your business.
Brett Bryant is Executive Vice President and Senior Loan Officer at Florida Bank of Commerce, which has locations in Merritt Island and Melbourne.