From CBIA News, January 2002

Getting a loan in today’s lending climate

Credit is available, but expect closer scrutiny of your loan request

By Chris Amorosino

Free-lance writer in Unionville

Although a Federal Reserve survey released in November found that many banks had tightened their lending standards for businesses, three major Connecticut banks say their standards have basically remained the same. Fleet, People’s and Webster banks are reacting to the economic slowdown not by setting the loan qualifying bar higher, but by more carefully examining loan requests and seeking more loan guarantees from agencies like the Small Business Administration (SBA). 

Connecticut banks may require more collateral today than a year ago. They’re seeking greater assurances that loan applicants fully understand the financial end of their own business and the current and future financial prospects of their industry. And banks are tapping into credit enhancement programs like the SBA’s Guaranteed Loan Program, which provide lenders with a 50% to 75% loan repayment guarantee. 

Getting a loan today may be tougher for businesses in industries impacted by the Sept. 11 terrorist attacks — for example, travel, entertainment and restaurants, and companies in manufacturing, a sector that’s been in recession for at least a year. Other businesses that may struggle for loans are those in the software, retail and service industries, says Rich DiChiara, senior vice president and sales manager at Webster Bank. 

How to win loan approval 

To increase your chances of having your loan approved, approach your bank with conservative financial projections and a realistic business plan. “We often see someone buying out a company producing x dollars of income, and they project they will double or triple the capacity with no added expenses,” says Don Fournier, senior vice president, small business at Webster Bank in Waterbury. “You just know it makes no sense at all. If it were that easy, the current owners would do it.” 

Make your business plan clear and detailed. Use an executive summary to highlight the plan’s key elements, explain why you’re seeking the loan, and tell how you will pay it back. Include a company history section to build a case for why your company structure, industry experience and management approach will lead to success. A section on your product or service needs to demonstrate your product’s market appeal. In a market analysis section, show the market share you can realistically capture. Analyze the competition in another section to prove you know your field and have a sense for overcoming obstacles. Finally, a production or operating plan should explain how you will deliver services. 

“Yesterday, today and tomorrow, a good business plan was, is and will be the most important element in getting a loan,” says Lou Paffumi, vice president and manager of community lending at People’s Bank in Bridgeport.

Financial data that will improve your ability to get a loan include a cash-flow statement (budget), a sources-and-uses-of-funds statement, a three-year income projection, a break-even analysis, a balance sheet, and the income statement. 

If your sales or profits have dropped off, the bank will want to know you’ve done some research and have a plan to get back on course. If your company’s healthy but your industry’s not, banks want to know you understand the economic climate and will be able to adjust by drawing on financial reserves or in some other manner. Fournier looks for companies that leave profits in the business during the good years to build the strength to weather the lean years. 

“We want to see that management is looking at every aspect of its operations to insure efficiency and the ability to capitalize on opportunities,” says Jim Schepker, senior vice president for small business services at Fleet Bank in Hartford. 

Keep in mind that bankers and business owners live at opposite ends of the risk/reward continuum. While owners tend to be glowing with dreams of growth and future earnings, bankers are practical and cautious. You need to see the bank’s conservative perspective and address it by presenting a solid business plan backed up with good financial information. 

Finally, don’t allow the weak economy to make you gun shy about seeking necessary funding. Banks are still aggressively looking for good, new, business-loan customers because they realize, as Schepker says, “Small businesses are the economic engine of New England.” 

[back to top]

Related article:

If the bank says no