By Rosalyn Demaree
Local bankers would like to debunk a myth they hear all too often.
Banks are making loans, they say, although more stringent regulatory oversight and the impact of losses nationwide may make it a little harder to get one now compared to five years ago.
Today’s low interest rates can help businesses lower their cost on interest and may make this the time to refinance loans, said Karen Miller, president and CEO of The Farmers Bank.
“It’s not easier (to get a loan) than it was five to 10 years ago,” Miller explained. “In some cases it could be harder. Banks are a little more particular about which companies they loan to and scrutinize information more.”
But, she points out, that pushback can be good. Answering tough questions about business plans can help businesses, particularly start-up ones, find success.
And Miller knows more than a little bit about success. A banker since 1985, she is one of four women running an Indiana-headquartered bank. Under her leadership since 2005, Farmers Bank grew its Hamilton County imprint this year, opening branches in Noblesville and Fishers. A Sheridan branch opened in 1990.
While the past five years have been harsh ones in the banking industry, Miller believes that an upside has been a growing trust in community banks.
“A community banker knows the business or person well and won’t make a knee-jerk reaction (to a loan application),” she said. “Tons of people have reduced their mortgages with community banks. They can walk in and talk to somebody.”
For businesses, “Now’s the time to try to get long-term fixed rates for loans on long-term assets like your home or buildings,” she advised.
Before making an appointment to apply for the loan or refinancing, however, Miller said a little homework is in order:
Get an assessment of your business plan. Ask an outside accountant or CPA to review and comment on it. If you have a relationship with a banker, ask him or her for an opinion before you start the loan application process.
Do some self-assessment. Take a thorough and totally honest look at your cash flow. If you’re thinking of expanding, determine what additional income it can generate. Make sure you answer the most important question: Can I make the payments.
Get your financial house in order
“Banks will loan money if you have good credit and good collateral,” said Chuck Crow, chairman and CEO of the Hamilton County-based Community Bank. “There’s an opportunity out there to restructure your position.”
A banker for 42 years, Crow is well-versed in how the industry works. He has been actively involved for many of those years in state and national banking associations, often holding leadership positions.
The decision to loan money doesn’t end with the customary handshake in the lending officer’s office. Like the Baileys faced in “It’s A Wonderful Life,” bank examiners regularly investigate an institution’s soundness.
“The bank has to prove to examiners that the decision (to loan money) was a good one,” said Crow, explaining that banks are restricted on the types of investments they can make. They earn their moneyfrom high-grade, government-back securities, municipal bonds or higher quality loans.
“Be really truthful with yourself in the pro forma.” a key document for businesses to complete when wanting a loan, he counseled, smiling as he adds, “We never see a pro forma say, ‘I’m not going to make it’.”
Use realistic numbersabout the cost to expand, the salary and benefits increase for new employees and the size of payment you can make. Consider honestly how much – or how much more -- of your product you’ll be able to sell. You can anticipate questions about this, whether the answer is 1,000 or 10.
“Bankers take a little risk, but can’t take risk all the time,” Crow pointed out. “Who would’ve made a loan to the guy who invented the hula-hoop?”
Look at your collateralto support the loan. Things happen unexpectedly that create problems making loan payments, including health changes, marital situations, an economic downturn or the loss of a job.
“Some bad things happen unfortunately,” he said. “Banks don’t want to be the bad guy. We’ll work with everybody as much as we can as long as there’s cooperation on both sides.” Extending credit and renewing the note can be options before collateral is liquidated.
Study your financial historybefore the bank does. Financial statements, several years of tax returns and an assessment of the value of what you’ve accumulated will be examined before a loan is approved.
This can be the tallest hurdle for young entrepreneurs to overcome because they haven’t had time to accumulate a lot of net worth, Crow said. They often need parents, other relatives and friends to help get them started, and then look at a commercial loan when the business is under way.
He doesn’t say that to discourage start-up business owners. “If you believe in an idea and are willing to be all in, roll the dice and try the idea.”
SBA loans bridge gaps
Loans from the Small Business Administration can help bridge the gap when funds can’t be secured from banks, relatives or friends.
“The SBA has some exceptional packages that First Farmers, as well as other community banks, have been successful in applying to small businesses,” said Tade J. Powell, vice president of First Farmers Bank & Trust, which specializes in commercial and agricultural business loans.
He points out, however, that applying for and processing an SBA loan can be a little more complicated and time-consuming than a commercial loan’s timeframe. “Banks that specialize in commercial lending and are well capitalized are still very active in commercial lending; however, the regulatory environment is making the underwriting process much more dependent on current documentation,” he said.
Before going for a loan, self-evaluate business plans quarterly and have copies of pertinent records – including profit/loss statements, asset/liability schedules, income and property taxes, compensation, and overhead expenses – ready, Powell recommended. That way, the institution better understands the dynamics of your business and how to structure the lending relationship.