7 Ways to Look Good to a Lender

Even as interest rates remain at attractive levels, many people looking to start or expand a business venture are having trouble getting a loan.

Banks may be pushing great deals on home-equity credit lines and other loan offerings, but they also are being extremely selective about who they lend to.

Now more than ever, you must engender the trust and confidence of your lender.

There’s no magic bullet that you can fire to bag yourself a trophy loan. But there are some guidelines that can put you on the right path to your quarry.

Here are seven dos and don’ts when applying for a business loan.

1. Even if you’re not organized, look organized. Yes, it’s especially hard when you’re trying to grow a business and changing your company’s internal systems to meet that growth. But this is when looking sharp is even more important.”I think the thing that will really impress a banker and get him excited about a borrower is a well-organized package,” says Bob Bifolco, executive vice president with Progress Bank in Blue Bell, Pa. What Bifolco likes to see: Three years of tax returns, an interim financial statement, listings of receivables and payables, insurance records that show what equipment the company owns and the assets’ possible replacement value and a cash-flow statement for the past year.”You bring in a package like that and the banker is likely to immediately deem you as a sophisticated prospect who is running the business in a sound financial manner,” Bifolco says.

2. Clean up your “a/r” and your “a/p.” That’s accountant-speak for accounts receivable and accounts payable. The problem is pretty simple: Lenders don’t like it when they see a business waiting for lots of money to come in (accounts receivable).”If somebody is getting paid in 90 days but has to pay his vendors in 30 days, we feel like he has a problem,” says Merv Shorr, senior vice president with Banco Popular North America. Old accounts receivable aren’t just an indicator of slow-paying clients — they also can be a red flag for nonpaying accounts. Lenders may want to see a reserve for bad debts to reflect potential uncollectible bills.

3. Your assets: Know that lenders care about what they are worth now. “Bankers are going to want to tie up more assets than the loan is worth whenever possible,” says Dana Barfield, a financial planner in Richardson, Texas, who specializes in planning for businesses with up to $80 million in revenues. So lenders will look at your assets not in terms of what you paid for them, but rather in terms of what they could be sold for if the business is ever to be liquidated. Overall, this is going to favor the manufacturer with a brand-new production line over the information services business with rapidly depreciating computer equipment. You can’t do much about this, but be aware and plan accordingly.

4. Improve your loan-to-value ratio. Desirable loan-to-value ratios vary by industry. Leasing companies, for example, tend to have higher acceptable loan-to-value ratios. Bifolco says that, in general, he likes to see loan-to-value ratios of 3-to-1 or less; Shorr suggests that 4-to-1 is a winner. But there isn’t a strict bar for this ratio. “What I’m looking for is a snapshot that will tell me if this company can make it through a few rainy days, through a couple of recessions,” Bifolco says. “Not being overleveraged is part of that.”

5. Remember that lenders want interest payments plus. It’s not unusual for people looking to borrow money to consider themselves good risks if they can show that they can service the debt — that is, produce enough monthly cash to pay the interest on the loan. But that’s not enough for lenders these days. Most of them want to see that you can generate enough cash to not only service the debt but also to pay back principal. So instead of just interest coverage, you have to think about — and be able to show — how the business will have total debt coverage.

6. Yes, they want you , but not too much. A business that has a track record of borrowing and repaying always has a leg up on getting a new loan. But lenders don’t like to see debt servicing consuming too much income. Debt-to-income ratios of less than 40% are preferred. That means if you are making $10,000 in profits monthly, not more than $4,000 of that should be getting siphoned off for debt servicing.”In general, we really don’t like debt-to-income ratios of 50% or more,” says Melissa Hammit, commercial credit analyst for Woodforest National Bank in Woodlands, Texas.

7. Personal credit dings? Hold back a bit. Lenders say that good personal credit can help with a business loan, especially since many small-business borrowers have to guarantee the loan personally. The reverse is also true: Some dings on your record could hurt you. So try to hold off on applying for a business loan if you’ve recently missed some payments or had other credit problems. Going more than a full year with a clean personal credit record can make a difference when signing that business loan application.

Protect Your Good Name with a Trademark

2. You may not have to go global to require a global trademark.

Major corporations — or anyone doing business globally — will have to be concerned about protecting their trademark not just in the United States, but anywhere they do business. With the Internet, it’s more possible than ever to earn money globally. Unfortunately, it’s also more possible than ever to get ripped off globally. But Radack says that many small businesses in the U.S. don’t have to try to rush out and establish worldwide trademarks. “If you’re a GM or a Ford or a Microsoft, then yes, of course you have to do this,” he says. “But what I tell my small-business clients is that if you start to sell in foreign countries, then at that point, yes, you do need to register in those countries.”

One of the biggest problems for small businesses selling in other countries is the relationship with their foreign distributor. “It’s not unusual that if you have a distributor in another country and relationship with that distributor goes south, the distributor may register your trademark,” Radack says. “The distributor can wind up with the right to your trademark in that country.”

3. It’s not hard to get started. As of 2004, it costs $335 to apply for a national trademark with the United States Patent and Trademark Office. Lawyers may charge $1,500 to $2,500 or more to handle the process. They point out that the research involved in clearing a trademark and even the process of filling out the trademark forms is not as simple as it may first appear. With what’s potentially at stake, a lawyer may be a good investment. You can start learning about the process yourself by going to Patent and Trademark Office Web site.

“Little guys, small businesses can go there,” Groetken says. “There’s a free searchable database to search trademarks, there’s information to help you do some basic research and learn more about what a trademark is and what is involved in establishing or protecting it. It doesn’t hurt to take the time to check it out and then hire someone.”

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One Response to 7 Ways to Look Good to a Lender

  1. Janene Julen says:

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