Is Your Lender Speaking in Tongues?
Keys to understanding the small business lending process.

By Larry Lee

Ability and planning alone aren’t sufficient to launch, manage, or grow a business. Business owners must also be up to the challenge of obtaining financing for start-up, working capital and expansion.

Yet for most business owners, the world of financing is uncomfortable. It is viewed as being bureaucratic and rigid (two things entrepreneurs will never be accused of being), and money is seen as a goal in itself. Entrepreneurs invariably see money as the means to an end and a way of keeping score.

Learning to deal successfully with the financing world is often what separates the truly successful entrepreneur from the business owner who is failing or just getting by.

Capital Concerns
Lack of capital is one of the most common reasons for business failure. Inadequate funding and a negative cash flow are universal concerns of business owners. At some point, most small business owners consider borrowing as a means of financing their business.

Although borrowing money is one of the most common sources of funding for a small business, obtaining a loan isn't always easy. Before you approach your banker for a loan, it is a good idea to understand as much as you can about the lending process and the decision strategy of the lender.  

A loan officer will be looking at the following questions/issues during the lending process:

•    Opportunity assessment. Does the borrower match the bank’s profile? The lender will review the borrower’s strategic objectives and financial structure, looking at immediate and long-term financial needs of the business.

•    Initial analysis. What is the specific loan request? Is the request legal and within the bank policy? The lender will review the proposed terms to assure they are logical and the risks appear to be acceptable. The lender will also review what caused the need to borrow and how long the borrowed funds will be required. Borrowing causes can range from a slowdown in accounts receivable collection to expansion of fixed assets. This is a major factor for the lender.

•    Repayment source analysis. What trends and risks affect the borrower’s industry? The lender will evaluate the financial statement trends and make assumptions about the borrower’s management of the business. Lenders want to make sure these trends will not adversely influence the ability to repay the loan. One of the major issues a lender will want to focus on is the ability of the business to repay the loan, in the proposed manner, with internally generated cash flow.

•    Loan structure. Should the loan be granted? Once it is determined that the loan should be packaged, the loan officer will look at the pricing (interest rate), disbursement methods, documentation and covenants needed for the loan structure.

•    Loan management. Is the borrower performing as expected? The lender will analyze any variations, and ascertain if it puts the repayment at risk, as well as determine how the bank’s position can be protected.

Choose the Right Lender
As a business owner it is imperative that you personalize the process. Long before the need to borrow arises, get to know your bank and banker on a personal basis. While one bank may specialize in home loans or auto loans, another may focus on commercial loans for businesses. Some banks may only offer basic deposit accounts while others have lock box services and sweep accounts. Choose the right bank for your purpose. That's why it is important to evaluate your business needs before you select your banker. Have your business account at the bank you intend to borrow from, and make deposits in person. Let your banker know about your business, discuss your successes and share financial statements with the lending officer. Let the lender know who you are.

Learn from the Process
When it is time to ask for a loan, make an appointment. Never go to the bank to visit a loan officer unannounced. Meet for an informal discussion to share your ideas with the lending officer and discuss potential plans. Find out if the bank does the type of lending you need.  Determine what conditions apply and discover any objections or restrictions the lender might have.    

Finally, never take  “no” for an answer. Turn a negative rejection into a positive learning experience by taking the time to find out why the final answer was “no.”  Don't despair. A “no” today doesn't necessarily mean “no” forever. Don't get defensive, instead, seek information so that your next proposal addresses and corrects any deficiencies in the rejected application.

Larry Lee is a business consultant at the University of Missouri-Kansas City Small Business Development Center (SBDC). He can be reached at (816) 235-6063 or by e-mail at