By Stewart Brannen

Oftentimes I am asked to share some practical advice on the best way to build a relationship with a local banker in an effort to obtain a loan or a line of credit for a small business.  Whether it is in New York or California, Michigan or Texas, the basic principles remain the same, and if applied, can make that trip to the bank a bit less painful and hopefully more productive.

Know Your Credit Score:  Let’s face it, one of the first things a banker will look at is your credit history, and a credit score that is less than 700 may result in an automatic “thanks, but no thanks” letter regarding your application for a loan.  If your credit is tarnished for whatever reason, it would be wise to resolve any outstanding issues you may have BEFORE talking to your banker.  So go on line, access your credit score, and determine what your score is and how this measures up regarding your own credit worthiness.  If there are errors on your report, be sure to take the necessary corrective steps to remove them, and ensure that you consistently obtain your highest and best score.  Even if you have a score above 720, and it is strong, demonstrating to a banker that you are on top of your credit goes a long way.  When a banker sees your level of personal responsibility towards paying off any debt and maintaining a strong credit score, it gives the banker more confidence in their willingness to lend you the money you need.

Know Your Collateral:  So let’s say that your business is doing well and you are demonstrating a profit in your financial statements – that’s a good thing!  However, the banker may look at your income statement and tell you that your bottom line income is not enough to cover the requirements for lending you the money.  What do you?  You take a look at the value of your assets (business or personal) that you have, and offer them as additional collateral if you are unable to pay off the loan, as required by its terms.  So knowing what the resale value of certain equipment, your car,  a piece of land or real estate is always good information to have when applying for a loan.

Know Your Capacity:  Capacity simply means your businesses ability to repay the loan.  So let’s take a closer look at how your business is performing, and what sort of key information a banker will look for?  Generally speaking, and depending on the size of the loan, a banker may ask for your tax returns for the past three years.  This will reveal what your sales revenue history (top line) and your corresponding income (bottom line) profits have been as well.  Now let’s say that you are applying for a $50,000 loan and your income for the past three years has consistently been more than $100,000.  In the banking world, that is called a 2:1 debt coverage ratio, and you will likely obtain the loan (all things considered).  Now let’s say that over the past three years you have consistently made only $25,000 in income per year. This would be a .5:1 debt coverage ratio, and as such, you would probably need to come up with additional resources to give the bank the debt coverage that it is looking for.  While all banks are different, any debt coverage ratio that is less than one normally requires much more underwriting attention and collateral requirements.

So if you want to stay on the right side of your banker, knowing these three C’s will certainly help you in obtaining financing wherever you apply for a loan.