Business loan: Getting your banker say 'yes'

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Writuparna Kakati | 01 Dec, 2009
Understanding bankers' mindset has become more important for business firms. While they have been still feeling the brunt of the economic decline, bankers have become pickier than ever before in lending. Banks, in these days, are prudent enough to follow "by-the-book" policies and that certainly has limited firms' ability to qualify for a business loan.

Bankers and entrepreneurs always and always have different interests and perspectives, and at this time of tight economy and tighter credit, these differences have widened. So entrepreneurs are finding themselves at a disadvantage and they need to obscure these difference. But how?

For a business firm, it is important to understand that banks, while granting loans, follow three cardinal principles of lending:

1. Principle of safety: It is important for banks to ensure that the borrower could repay the amount of the loan with interest as per the loan contract. So the lending bank needs to take into account the borrowers' honesty and character including credit history as well as his tangible assets and the viability of his business to earn profits. It might be frustrating for borrowers but something of much importance from the banker's perspective.

2. Principle of liquidity: Banks prefer to lend money for short period and for working capital purposes. They mobilize funds through deposits which must be repaid to depositors when demanded or as per contract over short to medium periods. So, bank loans are granted on the basis of securities which are easily marketable.

3. Principle of profitability: Like any business, banks also seek to earn profit. They need to earn to pay interest to depositors, incur operational expenses and also to distribute profit to owners. It is why bankers cannot spend money like non-profit organizations. They need to earn profit while ensuring safety.

What lenders look for before granting a business loan? By finding out what banks want, you can certainly increase the chances of getting your credit application approved. Before lending, bankers evaluate the following factors in order to mitigate their risk:

1. What is the business model? Is it broken or have it become obsolete due to market shift? Most entrepreneurs hate to believe it, but bankers usually acquire absolute understating of different business model as they work with them every day.

2. Bankers always take into account the business plan of the borrowing firm. Firms applying for financing must give the right message through their business plan. As per the the rule of safety, bankers always analysis the plan thoroughly to find whether it is a mere survival plan, a short term plan or it has a long-term vision with proper strategy to achieve it.

3. Determination of a borrower's credit worthiness has become a scientific exercise. Before lending, banks check a range of things such such as borrower's past turnover and repayment behavior, background and the related trade risks, nature of products (perishable or seasonal), size of the customer's order, firm's credit policies and practices, willing to furnish adequate collateral, etc.

Keeping in mind the current turbulence, businesses need to take some extra cautions before and during applying for a bank loan. Here're a few things they need to look at:

1. First and foremost, have a look at your business plan again. For bankers, a plan speaks volumes. So, firm up your business plan. If you think your plan needs some improvement, don't hesitate to discuss with a consultant.

2. If you are looking for bank financing, plan in advance. These are turbulent times and banks are doing due diligence checks thoroughly and more carefully than ever before. It may take time Also get ready to provide more information to your banker.

3. Look for alternative lenders. As a small business, find out and categorize your needs into long-term and short term requirements and divide your financial needs accordingly. When choosing between private sector banks and public sector banks, keep in mind that private sector banks are less likely to provide finance to a project that carry more risk. Public sector banks, in contrast, accept projects that carry more risk.

Businesses find trouble securing financing even at the best of times. But in most cases this is not because of the 'differences' between entrepreneurs and bankers. A business firm seeking financing should approach a bank tactfully. It is important to read the mindset of your banker, what he is thinking and looking for. Only it can create a comfort level and help you get what you want from your banker- the much required access to capital at this crucial juncture of economic revival.