What Are Bankers Really Looking for When They Lend Money to a Small Business?

Traditionally, bankers look at what are called the three “Cs”—character, credit, and collateral.

Character means more than not having a criminal record. It means that the banker feels confident that you are not going to suddenly disappear for parts unknown if the business runs into trouble. Specifically, bankers like to see ties to the community, such as long residence, family ties, and home ownership. A solid, hardworking employment history, as well as previous small business success, helps too.

A clean credit history is important. A couple of late credit card payments shouldn’t be a factor, but missing mortgage payments for three months in a row, for instance, would require a good explanation.

Bankers like good character and good credit, but they live for solid collateral. Equipment, buildings, and trucks—that’s the kind of stuff that bankers really like for collateral—solid value and likely to be worth a lot even if the business goes bust. Inventory, raw materials, and goods are second choices—they will lose their value more quickly than fixed assets will, but may still have some value.

Will I Qualify for a Small Business Loan

The criteria for business loans vary much more widely than for consumer loans, and often vary quite a bit from one banker to the next—even at the same bank! However, here are some rules of thumb to give you an idea of your chances of getting a loan:

  • Getting a loan for a new business is tough.
  • Fixed assets, such as machinery or buildings, can almost always be financed.
  • Current assets, such as inventory or goods in process, increase your loan chances, but the bank will likely substantially discount their potential recovery value.
  • Two or more years of profitable operation of your business greatly increases your loan chances.
  • The larger the owner’s investment in the business, the better your chances of getting a loan.
  • Loans to small corporations or LLCs will usually have to be personally guaranteed by the primary owner/operator, and often his or her spouse as well.
  • It is difficult to get loans to finance operating losses.
  • It is usually possible to get a loan to expand a modestly profitable business.

How Should I Make an Appointment to Apply for a Bank Loan?

Don’t just show up in person; make an appointment by email or phone first. Ask who the appropriate person would be to handle a loan request for a small business. Of course, it would be better to get a personal referral, such as from a friend or your lawyer or your accountant, although this isn’t necessary.

When you get the name of the appropriate loan officer, simply request an appointment, and don’t offer more details unless the loan officer asks for them. The more details you offer in advance of the appointment, the greater the chances are you won’t get the appointment at all! Sound confident on the phone or in your email, and sound like you don’t even need the money—that’s the kind of person that loan officers like to lend to.

How Do I Make a Presentation for a Bank Loan?

Keep the same tone in your presentation—warm, friendly greeting, but matter-of-fact presentation. Initially, keep it to a very simple summary: What type of business you have, how much money you are looking to borrow, what the funds would be used for, when it would be paid back, what possible collateral there would be, etc. You should also be able to present the banker with historical financials of your business. I would have pro forma financials ready, but only present them when the banker asks for them. After your very quick summary, let the banker ask for more information. Maybe the banker will just refer you to someone else.

Maybe the banker will want to ask a lot of questions about a particular aspect or issue that you hadn’t considered. No matter how much you want or need the funds, do not sound overeager—keep the presentation matter-of-fact. Remember, the response you get may be very different from one bank to the next, so if you don’t succeed at the first bank, keep trying at additional banks. But consider the feedback you are getting: Maybe you would do better asking for less money? Maybe you need better collateral? Maybe your financials looked sloppy? Or maybe you need more equity investment in the business before you can land a bank loan.

Takeaways You Can Use

  • Especially without solid assets, it is difficult to get a loan for a new business.
  • Develop a solid business presentation to apply for a bank loan.
  • Sound confident and not overeager.