Q: Why can’t I get a loan for 100 percent of my receivables?
A: Once a business gets into trouble, particularly with operating losses, receivables have a tendency to disappear as the entrepreneur struggles to keep the business alive. Liquid assets are usually burned up in the process, and it becomes much more difficult for a bank to collect the receivables of a business in trouble.
Some years ago, when my current bank cut off my borrowing, I visited at least a dozen banks, offering my receivables as collateral. Only one would loan me money, and even that bank discounted the value of my receivables to one-third of their actual worth!
Q: Should I go to a large or a small bank?
A: Generally, you are better off at a smaller bank. Larger banks will assign your account to a junior lending officer, who is bound to be moving up eventually. You need to think in terms of establishing a good relationship with a banker, not just a bank. The banker you deal with should be relatively stable in his or her job position and interested in you and your business.
The first bank I chose to approach for a business loan was the bank that I kept my significant checking and savings accounts with. I was very disappointed to note that the banker I was referred to had no interest in my business, let alone in lending me money. Eventually, I arranged borrowing through a branch of one of the largest banks in my area.
A few years later, my account was reassigned to a new hire—in a weird coincidence it was the same first banker I had seen at my old personal bank, years ago! Like a typical banker, not only did he not find the coincidence interesting, but he also didn’t remember me. Would you believe that the bank refused to lend me additional funds shortly thereafter?
I next went to a smaller bank with a reputation for lending to smaller businesses. During the 10 years that I was with that bank, I had only two bankers, and each was extremely attentive and willing to understand the financial demands of my business.
Q: Should I shop for the lowest loan rate?
A: No. I may have harangued about frugality and conservation in other presentations, but in terms of borrowing, you need to view interest rates with perspective. For a growing business, you generally need to be a lot more concerned about the availability of money than the cost of that money. If a bank offers you a very low interest rate but only half the money you require, what good is the low interest rate? Furthermore, interest rates will be in the same ballpark from one bank to the next.
Interest rates do not constitute the only cost of borrowing money. Some banks will require you to keep some offsetting balance when you take out a loan. This means that your effective interest rate is higher than the actual interest rate, because you can’t use all of the money you have been lent. Other banks will require that you pay a small percentage fee to keep a line of credit open, even if you aren’t accessing that credit. And because most banks will require a small business to do all of its banking there in order to finalize the loan, you need to take into consideration the entire cost of the banking relationship.
At my bank, I know that I am not getting the lowest interest rate in town. But I do know that money is always available to me, even if my business is experiencing a temporary downturn. Plus, I won’t have to go through a lot of red tape when arranging for funding.
Q: What interest rate should I expect to pay?
A: Typical interest rates for small business loans are 2 to 4 percent over the prime rate. The prime rate is supposedly the rate that the largest banks charge their biggest and most secure customers. But in reality, the largest corporations often pay even less than the prime rate when they borrow money. Just as the prime rate fluctuates, so does the interest rate on small business loans.
Q: Do I have to dress up to visit the bank?
A: Absolutely! Even if you are running a ditch-digging service, you need to put on professional business attire to visit a loan officer. There is an old saying that bankers prefer to lend money only to people who look like they don’t need it. Dress the part!
Q: Will a banker want to visit my business?
A: If you are borrowing a relatively small amount of money, few bankers will want to actually visit your business. They will be more interested in you. They will observe how you present yourself, how committed you are to your business, and what your previous experience is. And, of course, they will be very interested in paper confirmation of your business’s past and potential profitability, and the information contained in your financial statements and tax returns.
Q: How concerned should I be if it looks like I’ll be 30 days late for a loan payment?
A: Don’t be concerned at all. But tell your banker if you are sure you are going to be late. Explain why and indicate when you expect to pay. Be short with your explanation and don’t sound like you are in a panic. This is not the first time it has happened to them, believe me!