HOW TO NEGOTIATE BANK FINANCING - Part 2
Before you present your business plan/loan request package to the bank, let’s consider the loan request from the bank’s perspective.
WHAT THE BANK WANTS
Good Loans
This is how banks make their money. They want to loan money to companies that operate profitably and can repay the loan. A good borrower makes interest and principal payments on time. They do not provide unpleasant surprises (like unanticipated losses). The bank want borrowers who provide timely financial statements, collateral reports and other information for the bank’s credit files.
They do not expect borrowers to immediately renegotiate loan repayment terms or to ask for more money.
If the loan agreement contains covenants (financial statement targets), the company is able to comply or explain how they will get back into compliance.
Financial Information
It is nearly impossible to give the bank too much information. It should be well presented and consistent.
The bank needs to have information in their files to satisfy loan reviewers and examiners that this is a good loan that can be repaid. The bank wants historic annual financial statements prepared in good accounting form, interim (usually quarterly) internal statements in a consistent format with the annual statements and projections that are considered real and attainable.
Alternative sources of repayment
This is why the bank wants collateral, a personal guaranty, a borrower with a record of repaying debts and perhaps even a pledge of personal assets. The primary repayment source is always cash flow; the secondary repayment source is often sale of collateral and the third is the reliance on personal assets. It is best for all if cash flow can repay the loan.
Understanding the company’s cash cycle and cash generation ability is critically important for bank and borrower!
New Business Opportunities
Banks offer more services than just commercial loans. They are interested in opening checking and savings accounts (for you and the company). They want to clear your credit card transactions, handle trusts and investments, trade stocks and finance your personal toys (car, boat, etc.). The bank will not approve a questionable loan just to earn fee income, but the more fees, the more attractive the company.
Part 3 will offer some specific guidelines about how to present your loan request