Banker Survey: What’s Holding Up Your Small Business Loan?

September 13, 2019

We recently spoke with many small business bankers throughout the Southeast in an informal survey on the challenges facing small business owners in getting the financing they need—and what they can do to overcome them. We’re publishing the results in a 4 part series to cover the wealth of helpful information we collected.

Here, we will talk about the most common problems that can make small businesses their own greatest enemy when applying for loans. A business owner seeking funding is sure to be tripped up if they don’t address these four frustrating flaws.

Lack of Urgency

The main problem bankers encounter is a lack of urgency from borrowers and the effect that has on the application process. Bankers report that many business owners wait until the need has become critical to seek credit.

“It is better to engage in conversations before the need arises and begin working toward aligning their financial situation to match the lending requirements.”

On top of that, once the application process has started, many borrowers don’t show the urgency and understanding of the importance of timely, quality, complete financials when it comes to getting the cash they need. The current regulatory climate means that partial information and discrepancies won’t cut it.

“Given the lousy economy we have come through, prospective borrowers need to jump start their concern for accuracy and understanding of their financial situation. It is a tough sell to a credit partner that a prospect is a good credit risk when they lack sufficient sophistication to keep on top of their financial reporting or the quality of reporting is poor.”

Lack of Preparedness

A deeper problem than being unprepared for the loan application process is the risk of appearing unprepared to run the business. There are plenty of guides out there to writing a sound business plan, with good reason. If a company doesn’t include a cash flow forecast, the banker will have a hard time determining how much is actually needed. If a company tries to grow too quickly without enough equity, the banker will have a hard time justifying the risk. The important thing is to cover every base.

“lots of companies put together budgets but do not have contingency plans if their business is 10-15% worse that their budget and that causes them to trip a covenant with their bank.”

Unrealistic Expectations

Many bankers reported that that a large problem complicating the loan application process is unrealistic expectations of current banking terms and rates on loans. Loan approval is all about risk and how to mitigate it, and rate and structure is a reflection of that.

“Many people want the pricing of a traditional bank deal with a credit structure of a private equity/angel credit facility without their associated pricing.”

Bankers can’t provide a firm answer on rate, term and structure with only the bare minimum requested financials. For a borrower to get the best idea of what rates and terms they can qualify for, they’ll need to do some homework: prepare an accurate, complete financial package to discuss with multiple bankers. That being said, the best deal is not always the lowest rate. Smaller banks may not be able to compete on rate, but make up for it in spades with a supportive relationship and more flexible terms.

“You get what you pay for. Every business owner is free to find the best rate available, but that often comes at the expense of a personal banking relationship. When a company signs on with me, they’re gaining an advisor and an advocate.”

Weak Financials

1) Mixing personal with business

It is hard to separate personal financials from business transactions when there are constant transfers between each. And if the owner is using distributions as personal income, it can be impossible to get the loan needed.

“Many don’t understand the effect that large distributions have on retained earnings and, ultimately, leverage. Many business owners will in essence clean out the company because they can and not because they need to do so… When owners use the company as an ATM to live an over the top lifestyle, it makes it hard to overcome.”

2) Minimizing tax liability

We’ve written about this very phenomenon before, but it really strikes a nerve with bankers. Believe it or not, paying more taxes can be better for a company. When a business owner purposely inflates expenses to reduce taxable income, it sometimes has unintended consequences and can cause other problems such as preventing the company from getting approved for a loan due to a lack of profitability. More importantly, by reducing the company’s overall profit, the business owner is reducing the value of the company on paper. In the current regulatory environment, EVERYTHING must be documented.

“Often companies tell me ‘I/my business makes more than reflected on my tax returns.’ From a banker’s perspective, if it isn’t on paper, I can’t count it.”

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