Applying for a loan can be quite a process, so don’t underestimate the preparation time it takes to position the business and your own knowledge sufficiently to present well to any lender. I covered three simple things you could do to achieve this in my previous article on Biz2Credit.
What’s helpful in the preparation stage is learning how to think like a banker. In this article you’ll learn 3 key ideas to show you how bankers and investors think that few people will ever tell you.
First, every loan officer is responsible for his or her loan portfolio and to ensure the portfolio is sound. In other words, all the businesses in that portfolio are paying back their loans like clockwork. Every company in that portfolio acts like an investment for the bank. If each loan pays back principle and interest on time, the bank gets a predictable return. That’s the goal from the bank’s view.
What does the bank care about? Three things really; first that you’ll be able to pay your loan back on time and on the terms agreed to. That can only happen if your profits and cash flow are closely managed.
Second, the bank cares that none of the original assumptions on which the loan was predicated have changed for the worse from the time the loan was extended. It’s important to manage cash flow well so that even if revenues do not materialize the way you thought they would, you do not put the business at risk to pay off your loan. (If you’re unsure how to do this, I cover it in three chapters of my book, Accounting for the Numberphobic; A Survival Guide for Small Business Owners.) Small changes to how you negotiate payment terms with your clients, invoicing and collections policies can make a world of difference to you as well as to your banker. These minor adjustments to day-to-day management can truly change the entire risk profile of your company and make you a superstar when applying for a credit line. And you don’t have to hire another employee or take on another client to do this.
No one knows this stuff but it’s super important. Numberphobic makes it really easy to understand and implement.
The third thing banks care about is opportunity cost. Contrary to popular belief, most banks do not have endless wells of cash to lend so every loan they do make has to improve the bank’s balance sheet, in other words, perform well. Loan officers are really under the gun to make good loans. Just make sure your company is one of those.