A Bank Loan from the Banker's Perspective

Written by the Controller | CFO Advisor Team

What does your banker consider when making the decision to provide either initial funding or increased funding through bank lines of credit or loans?  To help the business owner understand the loan process from the bank’s perspective, see the thoughts of a retired bank officer below:

1. Bankers always want capital in the company.  It is far easier to lend to companies with significant capital.  The number one factor in failure of a small business is the lack of capital to sustain the company.  Bankers are lenders not equity partners.  The rate they charge on loans does not compensate them for equity risk.  Too many owners say they do not want to keep capital in the business because they are sole owners.  That is fine, however a bank should look to lend to them individually based upon personal assets, not business assets.  The lack of adequate capital for the size of the business is probably the most frequent reason for rejecting requests for a loan.

2. Overly optimistic projections.  Many owners go to a bank seeking a loan and bring in wildly optimistic projections to show the loan can be paid back quickly.  Be realistic and conservative.  It shows the banker you are looking at the worst case scenario.

3. Most business owners believe that bankers are too conservative, do not take risks, and do not understand businesses because they do not own one.  This could not be further from the truth.  Bankers make judgments on risk and businesses every day.  Every time they make a loan they are making a judgment on the ability of the company to pay back the loan, as well as the character of the owner.  Remember they see thousands of companies during their careers and they know what is successful and what is not.

4. Other factors are length of time in business and whether the owner has previous experience in the field.  Do the owner(s) have excellent personal credit?  If they cannot handle their personal credit in a satisfactory manner, how is the banker supposed to have faith in their ability to maintain the company’s credit?

5. Banks have to remain profitable, too.  For most small businesses, the owner’s ability to obtain the loan should take precedence over the pricing issue.

BIK’s outsourced Controller|CFO Advisors can assist your business foster a positive relationship with your banker.

The BIK Controller|CFO Advisors:

Tony Battaglia
Tim Beck
Al Knox
Larry Schmitt
Mark Stricker

Together we can perform a variety of accounting and financial services to help your business run more efficiently and economically.  Our objective will be to improve your bottom line through better processes and procedures. Contact us today at cfoservices@bikcpa.com or call 847-281-3209. 

Visit our web-site at www.bikcfoservices.com.