Small Biz Loans: What Banks Really Want


It’s no secret that it’s difficult for most small businesses to get a bank loan these days. But it’s not impossible.

Gone are the days when just about any business could get a loan for under $100,000 with simply a strong credit score, says Jordan Peterson, a senior vice president at PNC Bank in Pittsburgh. While credit scores are still king, today you need more to prove you’re a sustainable, viable business. Banks will review an applicant’s tax returns for the last few years and want to know industry trends.

“Banks have always underwritten on cash flow, but even more they’re looking at sustainable cash flow and if it’s going to be sufficient to pay back the loan,” says Peterson.

Here’s some advice from the experts to ensure your small business loan application stands out:

1. Work with an Accountant
Peterson, who has worked in the commercial loan business for 23 years, says that although banks will accept tax returns, it can help a small business owner to work with an accountant to help prepare his or her financial position to show good, detailed records to a bank.

2. Work with a Business Banker
Get to know and really work with a small business banker. The banker can help an applicant work through the process. Peterson notes that PNC Bank’s small business loan applications are electronic, but that doesn’t mean a business owner can’t meet with a banker in person to help explain the application.

3. Beef Up Your Business Plan
Presenting a business plan is important for some loan applications, particularly those loans that are financially guaranteed by the Small Business Administration. It’s important to acknowledge the history of your company in the plan, too.

Ken Klotz, director of the Illinois Small Business Development Center housed at Bradley University, says a business plan needs to contain growth ideas, new ways to reach an existing market, an additional market that hasn’t been tried before or a new product or service.

4. Explain Yourself
Don’t just fill out the demographics on a loan application, but give a good explanation about your business.

“If sales dropped 10% from 2007 to 2008, explain why that happened,” says Peterson. “Maybe it’s because your business exited a big customer because it wasn’t paying on time or maybe the industry is down but has stabilized.” If you don’t explain what happened you leave it up to the interpretation of the bankers, and they usually assume that the drop will continue. If writing isn’t your strong suit, there are many free business counselors available to help you.

5. Know Your Industry
Let the bank know that whatever industry you’re in, you’re the best in the business. "You want to be able to explain why you’re doing fine,” he says. For example, many contractors are suffering because construction is down but there are those who serve a niche, or those due for stimulus package funds, that are growing healthily.

6. Know Your Region
Banks like to review data that show industry norms by area of the country. Klotz finds the main data source for that is the Risk Management Association, an organization with bank members. It gathers anonymous financial statements of bank borrowers and averages them by industry both nationally and regionally. It’s not data that can be easily found and understood just by a quick Internet search, says Klotz. Small business development centers, SCORE offices and large libraries have access to the data as do other firms for a fee.

“There’s no sense in having wildly inaccurate financial projections just based on lack of information about industry norms,” says Klotz. “Banks will spot those deficiencies right away.”

7. Strengthen Your Balance Sheet or Income Statement
The goal of many small business owners is to see how many “perks” they can run through their business, which likely results in reducing net income and lowering taxes. Klotz advises small business owners looking for a loan to rethink that strategy.

“It could be beneficial for a prospective loan applicant to rethink some of those perks—such as taking a trip combining personal and business reasons—to show a larger net profit," he says.

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