How to Get Bank Financing for Your Business in 3 Steps

Once your growing organization achieves a certain size and financial capability, you will be able to negotiate relatively inexpensive loans with your bank based on the strength of the organization’s balance sheet and on the stability of its cash flows. While the appeal of a bank loan is obvious given its non-dilutive nature and low cost of capital, securing one is significantly more complicated than most organizations appreciate and many companies become extremely frustrated in the process. Most of the entrepreneurs and CEOs we speak to complain that after lengthy and cumbersome loan applications and negotiations, they ultimately couldn't secure the loan amount, price or terms they expected. ?

For those wondering how to improve upon their loan negotiations, here is our recommended 3 step process for nailing your next commercial loan application.

1. Plan your approach

Before you go out and seek financing, you need to be clear about your business capital requirements, and about the terms you are willing and able to accept. You don’t ever want to be surprised by a lender’s assessment of your business risk or the strength of your business cash flows. These are all critical aspects of your business which you need to first understand and plan around, with an expectation that not every lender will have the risk appetite to be a suitable partner for you.

For example, if your business is highly leveraged you should expect to have a challenging time sourcing more debt, even if you are profitable and growing. Some lenders may however agree to extend credit facilities on the assumption that sufficient profits will accrue onto your balance sheet and therefore help lower the proportion of debt to equity in the business. That said, be prepared to see those credit facilities quickly scaled back if the business isn’t generating the required profits or if those profits aren’t retained in the business to help fund its growth.

2. Show don’t tell

As much as bankers love hearing the business story directly from their clients, the reality is that many internal credit negotiations require that story to be presented in financial terms. Asking your bank to approve a new term loan for your business because you have always had “strong cash flows” isn’t nearly as convincing or straightforward as presenting them your forecasted income statement showing how the business expects to generate sufficient EBITDA to cover the annual principal and interest obligations on its debt facilities.

It’s in your best interest to provide this information directly to your banker as opposed to leaving it up to them to figure out if you truly can service the loan. It’s also the fastest way to expedite your credit application since many commercial portfolios have 80 clients or more and many of those clients will expect their bank to be the one to model their credit requests. Unfortunately, by doing so they significantly delay the process and ultimately reduce the likelihood of a satisfactory credit resolution, in favor of those clients who did invest the time to deliver all the information necessary for the bank to make a credit decision.

Remember that you do not have access to the ultimate decision makers who have the authority to approve or decline your loan request, so your best chance of securing the terms and conditions you want is by making it easy for the risk managers to understand the strengths of your transaction directly from your financial forecasting model.

For example, let’s assume your company has a history of paying out sizeable annual dividends. If you leave it to the bank to decide if you can truly service the loan you are requesting, they may feel particularly concerned about future corporate distributions potentially reducing the cash available for debt servicing, and may in turn try to restrict your ability to make those dividend payments without their prior consent. On the other hand, seeing a forecast that shows how your business expects to have ample cash flows for both debt repayments and corporate distributions may instead provide the bank sufficient comfort to allow the distributions under more flexible terms.

3. Prepare to pitch

Banks must meet their regulatory obligations while also maximizing value for their shareholders. To optimize this balance, they choose their clients carefully, with the goal of minimizing their credit risk while maximizing their interest earnings. To increase the likelihood that your bank will approve your loan under terms that meet your own needs, approach the process with a sales mindset. Prepare to make it easy for them to understand your business, so they can in turn get comfortable with its risk profile and approve the credit facilities you need to grow.

Don’t leave it up to the bank to figure out key details about your operation, because chances are they will not be able to invest the time and resources to match the level of information you have. Anything you leave out is likely to increase your business risk and negatively impact your loan application.

Prepare a comprehensive presentation and discuss your industry and market knowledge. Include the business strengths you are capitalizing on, the weaknesses you are working to address, the opportunities you are seeking to take advantage of, and the threats you are actively trying to reduce. Discuss the qualifications of your management team, the intellectual property and other intangible assets that give your business a sustainable competitive advantage. Finally, consider providing an overview of your supply chain and don’t forget to talk about your succession plan in the unlikely event something was to happen to you.

Our specialty at Financiario is helping companies to plan, negotiate and manage their financing needs. Email us if you require further guidance on your business financing, or simply to share if this article was helpful in your negotiations.