Everyone knows you have to have money to make money. So, at some point, any business owner who doesn’t have a rich uncle is likely to find himself in a bank chatting with a loan officer.
There are a number of factors that influence whether the business owner walks out with a loan, but the people doing the lending say much of it has to do with simply having a good plan.
“We specifically look for applicants with what I describe as an effective business plan,” said Rob Babcock, the Central/Western Massachusetts market president of TD Bank.
Deborah Larsen, senior vice president of commercial lending at Whitinsville-based Unibank, says she knows one sure sign a business owner isn’t ready for a loan: “Sometimes they’ll say, ‘What’s a business plan?’”
She often directs people to resources that can help them think through their strategy and invites them to come back once they’ve gotten a bit further along.
In fact, most businesses aren’t able to qualify for a bank loan when they’re brand new. Babcock and Larsen said most relatively young businesses they deal with have gotten through the first six months to a couple of years with investments from friends or family members, home equity loans or sometimes loans from alternative lenders.
Babcock said there are a few factors that come into play when a business seeks its first bank loan, starting with its cash flow and buildings or other collateral it can borrow against.
Then there are more subjective issues, like the character of the borrower. Babcock said it’s important that business owners set up in-person meetings with loan officers to help build trust, then answer any questions that come up right away.
Then there’s the business plan itself. Larsen said a good plan offers proof that the owner has thought through different contingencies — what happens if they get sick, or if sales turn out to be half of what they’d expected? Would the loan still get repaid? More importantly, it demonstrates that they know what they’re getting into in terms of their market, competitors and expenses.
“We need to know you understand the industry,” Larsen said. “We know a lot about different industries because we lend into them.”
Larsen said Unibank often refers startups to various other sources of help — alternative lenders like local community development corporations, accounting firms than can help them develop financial projections and industry-specific state programs.
“We don’t just say no,” she said.
Once a business has been profitable for a few months, Larsen said, it’s probably worth going back to a bank. She said some end up paying too much on high-interest loans simply because they haven’t bothered to try again with a traditional lender.
“I’ve seen people stay too long with the alternative financing,” she said.n
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