Lenders Want the Real Deal from Potential Borrowers

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When it comes to applications for business loans, banks want just the facts, a whole lot of factsBankers have some advice for small-business loan applicants: Be honest with us. The corollary to that? Tell us everything.

“The one thing you have is credibility and you don’t want to lose that by leaving out things or exaggerating things in a loan application,” said Kenneth Naglak, senior vice president of Jamesburg-based Financing for Industry, a lender and loan brokerage firm.

He was one of three bankers who spoke to owners and aspiring owners of small businesses at a mid-October meeting at the New Jersey Economic Development Authority building in Trenton. The get-together was one of a series of how-to seminars on topics such as hiring, pricing, buying insurance and seeking loans that made up the Trenton Downtown Association’s “Small Business Week.”

The speakers agreed that believability is everything. If a loan application assumes that a new business’ sales will double in the second year, there had better be some evidence to back that up. If there are high risks in the business, the banker will be looking for plans to deal with them. If the applicant hasn’t run a business before, lenders want to know why he or she thinks this project will succeed.

Credible business projections are very important to bankers, said Michael J. Segeren, vice president for Sun National Bank, which has approved 125 U.S. Small Business Administration loans of $2 million or less so far this year.

“Anybody can put numbers down, but how do you obtain those numbers?” Segeren asked. “Who are your customers? What is the cost of the product? What is the profit margin? You may see a 20% increase in year two, but if the industry average is 5%, there will be questions. Bankers look at historical figures. They are creatures of habit.”

A thorough loan application might include an outline of the business, biographies of the management team, financial statements, personal tax returns, records of previous financings, personal credit scores and even photos, if not actual samples, of the product.

“The package should paint a picture for a lender,” Naglak said. “Be honest and be upfront. One question I ask is: ‘What are the five to 10 things that keep you up at night.’ Those are the things I want to know about.”

The next question is, “And what are you doing to mitigate them?” Naglak said.

A bank’s primary concern, of course, is getting its loan money returned with interest. The speakers offered a number of tips on how to convince them and their fellow bankers that the odds are in their favor.

• Bad personal credit scores are deal killers. “Any lower than 600 it is impossible [to approve the loan], no matter how much sense the loan makes,” Naglak said. “The score goes up to 1800, and 650 and up are the best. Below 650, you are starting to have some questions.”

• If the loan will be used to pay for real estate, include an appraisal of the property and an environmental audit that addresses po-tential issues such as underground storage tanks.

• If the loan will be used to buy an existing business, get the financial statements of the business. “Examine their numbers to see how viable that business is,” said Segeren of Sun National Bank. “Will you be able to make a profit and repay the loan?”

• Brag about the company’s customers. “If you are a consultant with annual contracts, show the lender those contracts,” Naglak said. “Banks like to see that you get paid for the work you do.”

• An applicant who is starting a business for the first time should provide examples of past businesses he or she has run or been associated with. “It’s easier to get a loan if you have done this before,” Naglak said. “It’s a lot harder for startup businesses. They will look at your personal finances. They seek personal loan guarantees from the business owner. They use that as a way to ensure you are being attentive to the business.”

In the end, the bankers want each loan seeker to provide the most compelling application he or she possibly can. “Always err on the conservative side, said Mark A. Mignogna, an assistant vice president at Sun National Bank. “Give the initial information and we can fill in the spots that are empty.”

James Bortolotti, regional vice president of Sun National who was present at the seminar but not a speaker, offered a note of understanding concerning the inflated revenue projections that bankers see. “At times, the projections are higher than they should be,” he said. “That’s done out of excitement, not to mislead the banker.”

Perhaps, but the applicant who wants to inspire trust will work hard to curb the over-enthusiasm and get it right.

Keys to Getting a Small-Business Loan

Here are some pointers bankers gave at a seminar in Trenton on how to apply for small-business loans.

• Maintain good personal credit. A credit score below 650 raises questions. A loan is practically out of the question with a credit score of below 600.

• For real estate loans, include an appraisal of the property and an environmental audit that addresses potential issues such as underground storage tanks.

• Brag about your customers. Banks want to see that you already have customers or contracts.

• Give examples of past businesses you have run or have been associated with.

• Fill out what you can in an application. Don’t make up answers. Bankers will help fill in the banks.

• Don’t inflate projections. Bankers research the industry and will likely question unlikely estimates.

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