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Getting banks to say 'yes'
By Jenny C. McCune Bankrate.com

Bankers fearful of bad times this year and burned by bad loans last year are instituting more stringent loan requirements -- even though the Federal Reserve has cut interest rates several times.

"It's a good news/bad news situation," says Mike Kiser, president of Wisconsin Bank in Milwaukee. "Although the interest rate cuts are positive, the other side of the coin is that a number of banks are tightening up on credit after writing off huge losses last year."

The losses have made banks more wary of lending to highly leveraged or struggling companies. Banks that had big write-offs last year must set aside more money this year to cover bad debt. In short, they have less to loan and have to be more careful about who they loan to.

Finally, the troubles of many blue-chip firms such as Xerox, Owens Corning and Lucent Technologies have given other businesses the loan equivalent of a black eye. Banks are casting a critical eye toward all commercial loans because of the problems they've had with companies that ordinarily aren't big credit risks.

But while bankers have gotten more shy about lending, that shouldn't stop a small business that needs capital from trying to get a bank loan. Here are tips on how to bag a loan during today's credit crunch times.

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Carefully craft a business plan. "People will say, 'I know to do that,' but it's surprising how many small business owners fail to do a good job," says David Amick, executive director of Premier Capital Corp., an Indianapolis-based small-business lender. To get a loan from reluctant lenders, you have to woo them. Give them hard numbers about your company's financial performance, and give realistic projections about future performance. Make a persuasive case why your company needs the money and why it makes sense for the lender to lend your company money. "In other words, demonstrate why you are credit-worthy and how you will pay back the bank," Amick says.

Find a bank with business sense. Kiser recommends looking for loans from banks that specialize in business lending. "Not every bank understands small business. Many focus on retail and consumer lending," Kiser says. "You have to find a lender that understands business in general and that specifically understands your small company."

Alternatively, seek a loan from your personal banker. Particularly if your company is new and doesn't have much of a track record, it can make sense to talk to your personal banker about a business loan. Your banker may not know your field, but if he or she knows you, that can go a long way in persuading the institution in lending your business capital. "Go to where you currently bank because they know you and your history," Amick recommends. "If they've lent to you in the past, they will be more likely to lend to you in the future."

Don't overlook the SBA. The Small Business Administration's guaranteed loan programs are generally easier to obtain than if your company applied independently to a lender.

Ask for the right loan. Before you approach a lender for money, make sure you're choosing the right financing tool to do the task. For example, cash-strapped small businesses will use a line of credit to finance any and every purchase instead of using it for its true purpose: cash to get over the peaks and valleys of business. "I've seen companies finance $50,000 or $100,000 worth of equipment using their credit line, and then at the end of the year they were unable to pay it off," Kiser says. "That's not what a credit line is designed for."

Keep your credit reports clean. That goes not only for your business accounts, but also your personal checking accounts. Routinely examine your credit reports for mistakes. "This often gets overlooked, but it's very important for small businesses where the owner very often is the business. You have to have a clean record if you expect to get a business loan," Amick says.

Look for a partner, not a loan. Small businesses can get trapped into accepting a loan from any lender. Unless the situation is dire, your company will be better off taking the time to find a lender that will work as partner, rather than a financial institution that will be apt to cut its losses (i.e., call your loan) at the first sign of trouble, Kiser says.

While getting a loan today can be tough, taking these steps should make the road a little less rocky and improve the odds that your company will get the financing that it needs.

Jenny C. McCune is a contributing editor based in Montana

-- Posted: March 19, 2001


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See Also
Escaping your loan's personal guarantee clause
2001 small business financing picture: VCs out, rich uncles in
Commercial lending begins to tighten
SBA's main loan guarantee program

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