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The Lending Environment and Its Effect on Your Business

As published in the March 2009 issue of The Greater Lansing Business Monthly.

One of the many challenges facing businesses as they look to enter or expand their presence in the marketplace has always been obtaining the necessary financing to meet their working capital and fixed asset investment needs. However, in this troubled economic climate, even those businesses not wishing to grow or expand are being forced to place effort into securing renewal of current lines of credit or other commercial loans. We all know that banks have long played a key role in helping businesses both large and small gain access to capital. To be able to take advantage of these opportunities, businesses should gain an understanding of the current lending environment and the criteria now necessary to obtain a loan.

In the current environment, expect more communication with your banker and requests for more financial information. Also, it is not uncommon for line of credit limits to be reduced and interest rates increased at renewal time. Lenders who maintain regular contact with you and other businesses in your community will be more familiar with the local business climate and factors affecting their specific customers. They will rely less on national trends to make lending decisions. Businesses have a better chance of obtaining a loan from a lender whom they already do business with—especially if they have demonstrated their creditworthiness to the bank over time.

A good way to build a relationship with a bank is to open a deposit account and maintain that account carefully. This likely is a minimum expectation for commercial loans. Avoid overdrawing, bouncing checks and low balances. The goal is to establish a relationship with your banker, help them understand your business, and keep them informed of significant matters affecting your operation.

When you are ready to apply for a loan or a renewal of a loan, there are certain documents you will need. Tax returns, financial statements and appraisals of collateral will be necessary. Expect to provide more information than was necessary in the past. Be ready to demonstrate how much your business is worth, your unique strengths and strategies, the qualifications of your management team and your experience within the industry.

It is important to note that illustrating your future cash flow might be the most important thing you can do, as that is usually a key indicator of your ability to repay the loan. You should have realistic, pro-forma financial statements and cash flow projections put together based on obtaining the loan. Have a detailed plan of how the loan will be used and how the loan will be repaid given best-case or worst-case scenarios. If it is for a small business, you will need to provide personal financial statements and tax returns for the past three years including your personal credit history.

Too often, businesses get turned down because their accounting is hard to follow or not transparent enough. For example, some businesses may employ aggressive strategies to avoid taxes that also end up making their business appear to be a bad candidate for a loan. Do yourself a favor and work with a qualified CPA firm to ensure your documentation is up to par before you take it to the bank.

Do not be offended if your banker asks for more documentation and even suggests reducing your business line of credit. Instead, be prepared to negotiate, provide supporting financial information and justification for your loan request, and plan for repayment. Following these tips can help gain the financing you need for your business and will help your bank see how important the success of your business is to you.