Preface: The goal of this article is to teach you how to successfully obtain bank loans with a competitive interest rate in the 7.50%-10.25% range. There are many other non-bank lenders in the marketplace that will make you a loan, but since their underwriting criteria is less strict, they will charge rates in the 12%-30% range. You don’t want this, as these rates will severely eat into your net profits, taking money out of your pocket! For purposes of this article, let’s assume loans in the $500K-$8,000MM range. However, the process is still the same for smaller loans.
Success is a function of two variables:
- Preparation
- Planning (which includes research)
Preparation
In the area of preparation, the most important factor is that you ensure you have high-quality accounting systems, both internal and external (your CPA). If not, fix it. Your internal financial statements must be 100% accurate and managed by an employee who is highly capable. Commercial banks approve loans considering many variables, but they rely heavily on your financials (Balance Sheet, Profit & Loss statements). No
The next variable is a business model that is written down and one that you can recite at a moment’s notice. Give this model to the banker. It answers the banker’s question, “How do you make money?” As a summary, your business model should at least include:
- What product or service are you selling?
- What is your geographic market?
- Who are you selling it to? (Your target market)
- What benefits do they enjoy by buying from you and not your competitors?
- How do you distinguish yourself from your competitors? (Value proposition)
- What distribution method do you use to get your product or service into the hands of your customers?
- What does it cost you to produce your product or service, and what do you price them at?
In addition to your business financial statements and your business model, assemble and be ready to provide the bank with the following information. This info includes, but is not limited to: business and personal tax returns; a personal financial statement; a list of your current business debts and terms; a copy of your personal credit report; and your most current accounts receivable and accounts payable aging reports. (This is the minimum; the list will expand later!)
Also, compose a short memo of your loan need to give to the banker. It should include: what size of loan you are seeking, what you will use the loan funds for (be very specific), and what will be the impact on your annual sales and profits if you get the loan. Most important!
This concludes the Preparation section.
Planning
Let’s start the planning portion with this statement: God did not create all bankers equal, or CPAs, attorneys, and doctors, for that matter. Some are great, some are okay, and some are just flat-out bad. Not all banks are the same. Your job is to connect with a bank that is a good fit for your personality, your business size, your industry, your loan size request, and one that will assign an officer to your account who will provide timely, personalized service.
Your current loan request is the start of a financial partner relationship because, as you grow, you will need a myriad of ongoing banking services, including more loans and other non-loan services. Picking the wrong bank is like a bad marriage that ends in a divorce. Plus, picking the “wrong bank” will affect the long-term value of your company!
So, how do you pick the right bank? Research, baby! There is a planning strategy that involves researching banks. I will give you my first planning strategy: If your annual sales are in the $3MM to $20MM range, avoid the mega banks such as Bank of America, Wells Fargo, Chase, US Bank, etc. Their sheer size creates high levels of bureaucracy, making it virtually impossible for them to provide the high-touch service that you need. These huge banks are better suited for larger companies. Limit your research to small to medium-sized commercial banks in your area. For small to medium-sized banks, a loan request in the $5M to $8MM range represents their “sweet spot.” However, you’re not in the market for just a loan, but to establish a bank relationship.
So, how do you research? Start by using Google or ChatGPT. Ask this question: “What are the leading small to medium-sized business banks in my area?” (Banks must be less than $5 billion in size!) Also, ask friends and business associates for recommendations (but be careful here).
Pick 5-8 banks and be prepared to send them all the documents I mentioned in preparation, but only after you have vetted them. After you have your list, contact all of them to find out the email address of any commercial loan officer on staff. Send the officer an email stating that you are seeking a loan of a certain size and what your business does. Ask the banker if they are interested. If they are, send them all the necessary documents and indicate that the information is private and confidential. Hopefully, you will get an interested audience of at least three banks. After they have thoroughly reviewed your information and are still interested, offer to meet them in person—either at your business or their office. If they refuse to do this, drop them. If your face-to-face meeting is successful, the goal is to have at least three banks send you general loan proposals with terms and conditions so you can pick the best one.
You may think this article is recommending too much work to do. But trust me, it is worth it. Your business will get the best loan it deserves, and it will set your business up to grow in the future and thus increase its value over time. As CEO, your job is not only to procure a good business loan(s), but also to stay in business! Seventy percent of companies are out of business within the first seven years of their initial establishment. The main culprit is inadequate or the wrong kind of financing/loans.
(The whole process I have described will also work if you have already received a loan from your bank, but the relationship has gone sour for a variety of reasons, like they turned down your most recent loan request!)
Qualifier: If your business is not profitable, you are not “bankable.” So, this article will not apply to you. Fix your profit problem first, and then implement my strategies.
Good luck.
Eugene E. Valdez is the owner and founder of The Loan Doctor & Associates, Inc., as well as the producer/host of a business education podcast called “CEO To Rainmaker.”
For more information, contact Eugene E. Valdez at:
Email: evaldez@theloandoctor.loans
Phone: 909-230-0024
Web: theloandoctor.loans
