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What a business owner should expect when seeking a loan.

By Greg Rafuse, Commercial Lending Relationship Manager, HomeStreet Bank

 

Borrowed money is a great way for businesses to fuel growth without giving up equity. While there are always costs associated with this, accessing credit can be easier and more affordable than you might think. Here’s the secret that you probably already know: commercial banks all want to earn your business. They simply need to understand it to provide the funding you’re looking for.

Once you choose your commercial bank and start the relationship, its goal should always be to say yes — within reason — and provide your business with the needed capital. That’s how both parties grow and build a sustainable relationship. For that reason, it’s a good idea to seek to understand your bank. Here are items you can keep in mind to better understand how lenders assess business loan requests.

Borrowing need

This is a key consideration for commercial lenders as well as businesses looking to access debt capital. It’s important that both sides understand the true use of cash and the impact that use of cash may have on your business in the future. Because of this, banks typically seek to match a credit term with the useful life of the asset the funds are being used to purchase or finance.

For example, a new commercial building can help strengthen your balance sheet, and you may be able to find longer terms and longer amortizations for this type of financing. A revolving line of credit secured with short-term assets, like accounts receivable or inventory, is on the other end of that spectrum. These items are typically collected or sold in a very short time, and the cash received would be used to pay down the line immediately.

Businesses can find themselves in trouble when using a short-term facility, like a line of credit, to purchase a long-term asset, such as real estate or a vehicle. As a result, line of credit funds could be unavailable for use to support cash flow if the business finds itself in a crunch. 

Historical financial performance 

Commercial lenders will typically ask to review the last two to three years of business financial statements, along with financial statements for the owners.

Lenders are looking for profitability and sufficient historical cash flow to show that a business can comfortably make payments on new credit. However, trends will also be considered. Think about revenue trends, profit margin trends, trends in retained earnings and balance sheet leverage, and more. Trends in the right direction will provide an additional level of comfort and suggest that this assessment of past performance may be the most conservative approach.

 
What about the times when historical performance is not the best indicator of future performance? Banks care about that story, too. Perhaps financial trends over the past few years have been moving in the wrong direction. If there are other strengths to deal, this shouldn’t stop the process, but it will prompt some additional conversation about what future projections look like and why.

As a business owner looking for additional funding after a downward trend, try to clearly articulate what has changed recently that will lead to better performance. 

Collateral

Collateral an important component of a lending conversation. Providing collateral for business credit facilities can help you obtain better terms, lower rates, and approvals in situations where you otherwise may not be able to access the credit you need. Forms of collateral can be real estate, equipment, accounts receivable, inventory, or cash. When a credit request is under-collateralized, personal collateral of the owners can also be considered. Having collateral to back up the total amount of debt, or more, can help mitigate other areas where a credit request may be lacking.

While these are just a few of the items considered when seeking an approval for commercial credit, they’re key pieces of the puzzle. It’s also important to note that there is no magic formula for a credit approval in the commercial financing space, and this differs greatly from consumer finance. While procedures and lending guidelines are in place and will always be used, mitigating factors are often considered to offer additional strength in one area when weakness may exist in another. 

As a business owner, first and foremost, seek out a banker that wants to understand you and your business well. Your commercial banking partner should be a trusted partner who brings ideas to the table to help your business thrive today and far into the future.

At HomeStreet Bank, we understand that you have unique needs depending on your industry, size and location. To learn more about our suite of business banking and commercial products, visit homestreet.com/business

 

All loans subject to approval.

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Did you know: we have a full suite of Commercial Banking options.

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