The most recent report from the Federal Reserve suggests that commercial banks in the U.S. are starting to lend to businesses again. In the first quarter of this year, lending to businesses increased 3.2%. Lending by large banks increased 3.5%, while small banks increased their business lending by a smaller 2.3%.
Borrowing from a bank is generally much cheaper than borrowing from other sources such as asset based lenders and factors. Whether your company is attempting to establish bank credit for the first time or you are looking to increase your existing facility there are several things you can do to increase your chances of achieving your objectives. These actions fall under three general categories.
# 1. Know your bank(s)
I use the plural for banks because you should approach more than one bank. Nothing succeeds like competition in any field and that certainly applies to banks. Many business owners will shop for a provider of IT services or of other business services, but fail to bring the same element of competition to a bank situation. This is probably due to the incorrect notion that all banks are the same.
Banks that make your go-to list should be large enough to handle your needs, but small enough that your business is important to them. You should get to know the banks, their lending standards, the approval process and timing of, other companies in your industry they lend to, the health of the bank in general
Don’t take the bank’s word for their answers to the above questions. Check them out with other clients and look at publicly available documents. These documents will tell you if they have increased their commercial lending, whether they have a bad loan problem, a sure sign they will not be increasing their lending at any time soon and the general health of the bank.
# 2. Be prepared
Prior to approaching your target banks, prepare a list of important documents to give each bank. This will speed up the process and will also show that you are professional and well prepared. These documents should include but not be limited to the following:
- Three years financial statements either audited or reviewed.
- Three years tax filings.
- At least a one year forecast (3 years is better).
- Latest Accounts receivable and payable ageing.
- An executive summary (see below).
# 3. Do part of the bank’s work for them
Prepare a 5 to 6 page executive summary for the banks. This is your chance to tell your story in the best possible light. Sections should include the following:
- History and background.
- Product and/or service.
- Market discussion.
- Senior Management.
- Discussion of historical financial results.
- Discussion/explanation of forecasts.
This executive summary allows you to explain your forecasted growth, any problems that are evident, and most importantly, how the bank will be repaid. It will greatly increase your chances of obtaining your goals and allow you to drive the process.
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