Submitted by: Charlie Crawford, CEO, and Lou DeCesare, President, Hyperion Bank
Whether you’re investing in real estate, inventory or infrastructure, commercial loans can give owners the capital they need to sustain or scale a small business. Before you approach a bank for a loan, understand what lenders look for to position yourself for success.
How to Apply
Lenders know that people repay loans, not companies. A community bank lender will want to learn about you personally, as well as your business situation. Keep that in mind as you prepare your loan presentation, and prepare for the following questions and concerns:
- How much do you intend to borrow, and how will you use the loan?
As a prospective borrower, you must have a clear understanding of how much money you need, how you plan to use the loan proceeds, and how the loan proceeds will economically benefit the business. Develop these points in your business plan, and plan to clearly and concisely communicate this information to the bank.
- Will normal business operations generate sufficient cash flow/profit to repay the loan over time?
Cash flow from the business is the primary source of repayment for commercial loans. Be prepared to show the bank historical financial statements which demonstrate your ability to repay the loan through the normal cash flow/profits of the business, along with your business tax returns for the last three years.
- Do you have enough collateral to secure the loan?
Lenders require collateral as a secondary source of repayment. Community banks usually require collateral for all commercial loans, and they generally prefer real estate collateral. Prepare to tell the bank how you plan to secure the loan and present a realistic valuation of the proposed collateral, because the bank will make an independent assessment of the value to support its loan determination: the maximum loan amount is 80% of the appraised value of collateral real estate.
- Will you personally guarantee the loan?
Because community banks lend to business owners, not just businesses, they expect owners to stand behind the loan and make sure the loan is paid in full. They also expect the owners to have a personal stake in the deal (typically 20-30% for real estate development projects). Your proposal should include a personal financial statement listing your personal assets and liabilities, and your personal tax returns for the last two years. The bank will also pull a personal credit report on the commercial loan guarantors to look for a positive pattern of debt repayment.
Where to Apply
In getting a loan, where you apply can be as important as how you prepare. Community banks are good lending partners for small business owners because they are built to reinvest in the community: small commercial lending is what they do every day—as opposed to big banks that lend to multiple market segments, where larger loans are their core business. For small business owners, this means community bank lenders may be more experienced in seeing opportunities at the smaller end of the market, and they may have a better understanding of the challenges that running a small business entails—as well as strategies to help you secure the loan you need, such as an SBA loan for additional credit enhancements. Think of a community bank lender as your business partner, and you’ll be setting yourself up for a successful banking relationship.