“C” is for “Credit”
When it comes to knowing the loan process, these “Cs” are above average.

By Lori Wilkerson

Entrepreneurs looking to launch “big ideas,” or owners of established companies hoping to expand, often find themselves taking similar steps to apply for a loan. For some, that journey to the bank can be filled with trepidation and anxiety.

The first step in changing concern into confidence is to understand the loan process from the other side of the desk. What are the checks and balances a banker must go through to determine if this is the right decision for you and a smart decision for the bank?

To help gain a better perspective of the loan process, there are common guidelines a banker refers to, known as the “Credit C’s.”

Character
What is your track record with other loans? Bankers will review your loan history and business plan to determine the level of risk or confidence of getting their money back.

Word of Advice: You need a business plan. And, an industry source or someone with experience should review your plan to ensure there are no “red flags” in securing a loan. Be open and honest. Trying to hide something will surely lead to your loan being stamped  “Unaccepted.”

Capacity
Do your current budget figures accurately project revenue to make loan payments? Are those projections substantiated with quantifiable data? A banker needs to have confidence and realistic expectations that your business will generate money.

Word of Advice: Prepare in advance to have money set aside for a down payment. Don’t come to the table empty handed.

Capital/Collateral
Does your company have resources that can be liquidated? Do you have access to bonds or real estate that could serve as a source of payment?

Word of Advice: Prepare a list of assets with current market value, and offer a signed guarantee that collateral will be used first as a source of repayment.

Conditions
Have you managed a business successfully during a tough economy? What is the current state of the economy, and how does it affect your industry? In some circumstances, the success of your business during tough economic times will be completely out of your control. And remember, the economy can rapidly change.

Word of Advice: Have a strong knowledge of your industry’s trends at the time, both nationally and in your market. Timing can be critical. If the industry is not in a robust cycle, you may want to wait six months or a year before approaching your banker for a loan.

Before You Visit a Banker
The number one reason businesses fail is bad management followed closely by insufficient financing. Before sitting down with a banker, business owners should review these 10 questions developed by the U.S. Small Business Administration.

1. Do you need more capital, or can you manage existing cash flow more effectively?
2. How do you define your need? Do you need money to expand or as a cushion against risk?
3. How urgent is your need?
4. How great are your risks?
5. In what state of development is the business —start-up or transitional?
6. For what purposes will the capital be used?
7. What is the sate of your industry? Businesses that prosper while others are in decline will often receive better funding terms.
8. Is your business seasonal or cyclical? Loans advanced for cyclical industries such as construction are designed to support a business through depressed periods.
9. How strong is your management team?
10. Perhaps most importantly, how does your need for financing mesh with your business plan?

Securing a loan to start or grow your business can be a successful transaction. Realize that bankers are there to help. They do want to lend money. Take the time to review, analyze and question the objectives of your business. Then, review it again before approaching a bank for a loan. You should not rush into the loan application process. A wise banker once said, “Don’t make long-term decisions on short-term emotions.”

Lori Wilkerson has been a banking leader at UMB in Kansas City for 15 years. She oversees and supports 42 banking centers throughout the Kansas City metropolitan area.