Regardless of the success of your business, most if not all companies will eventually need some sort of outside funding. We recently spoke with John K. Jepson, Jr., Vice President of Business Banking at First Niagara Bank, to get some insights on the commercial lending process.
CBIA: When a business owner determines that there is a need for additional capital, what are the most likely sources of outside funding?
John Jepson: The most accessible options for financing include banks; private investment; government/quasi-government agencies (U.S. Small Business Administration, Connecticut Innovations, the Connecticut Department of Economic and Community Development); and venture capital companies. Each financing source has its own unique advantages that business owners should explore.
CBIA: How should a business owner get the bank loan process started?
John Jepson: A first step is a good business plan that outlines a business owner's target market, sales history or goals, and most importantly, how and to whom they sell their product. Once the business plan is complete, the business owner should schedule a meeting with his or her banker to discuss the business plan and the financing needs required to successfully execute it.
CBIA: Given the importance of the business plan, is it something a business should have a consultant do?
John Jepson: It really depends on the scope and scale of the business and management's experience. If a business owner has significant industry experience, then an outside consultant may not be necessary. Alternatively, if management has little industry experience or is unsure how to present financial information, it may be beneficial to take advantage of a consultant's experience in crafting a business plan. If the business owner is unsure of how to proceed, they should first approach their bank or visit a Connecticut Small Business Development Center. Either can help frame the discussion and assist in developing an effective plan.
CBIA: When the business is ready to present its case to the bank, what are the most important factors you consider?
John Jepson: The bank will first look at the business' cash flow and the borrower's ability to repay the loan. Once the banker is satisfied with the applicant's ability to repay the loan, the next considerations will include an evaluation of the collateral to be pledged (business assets, personal assets, business or personal real estate) and the character and track record of the owners/managers of the business. For instance, what industry experience do they have? What experience do they have running a business, and how have they handled their personal finances?
CBIA: What about credit history? Are there score levels that automatically eliminate a loan proposal?
John Jepson: A credit report (business or personal) is an indication of how an individual manages their personal or business finances. A lower credit score does not necessarily mean the answer will be no, but a banker will want to look at what is driving down that credit score and if those issues were avoidable. Sometimes a borrower may have extenuating circumstances that legitimately explain certain detrimental reports. In those instances, the bank may be still able to move forward.
CBIA: A family business is responsible for fulfilling its loan obligation just like any other, but given the dynamics of these kinds of businesses, are there special concerns that come into play when considering a loan for a family business?
John Jepson: The same cash flow, collateral, and character metrics apply to all loan requests. The bank needs to know that regardless of the business' structure, it will be able to repay the loan. However, your banker will also want to know about all family members involved in the business, who has management control/decision-making authority, and if there is a succession plan in place. If succession planning is relevant (or soon-to-be relevant) at the time a loan application is made, it is many times easier to address those potential management/ownership changes during the loan approval process rather than after the loan has been closed.
CBIA: When you are reviewing a loan request, what are common red flags you see?
John Jepson: I would say the number one red flag is when a business submits a loan application for a company where the owners have made little or no personal investment. Why would a bank risk its capital if the small business owner is not willing to take similar risk? Under-capitalization is another red flag for a lender. Your banker wants to be sure that the business has enough working capital to support both the full business cycle and projected revenue growth. Does the business have enough working capital to purchase its raw materials, produce and sell the product, and collect payment while still paying its bills on time?
CBIA: What other advice can you share with our readers that might help them in the getting their loan application approved?
John Jepson: The best advice I can give is to fully explain your business and your goals to your banker and provide him or her with complete copies of all financial information required. Come prepared with all necessary financial statements including all the footnotes and schedules. Give your banker a complete copy of each tax return requested, even if those returns have hundreds of pages. Make sure you present a financial projection of your income statement for at least the coming year. Many borrowers don't feel that such ancillary information is relevant to the credit decision, but in most cases it really is. It is likely that providing only partial information will slow down the loan underwriting process.
In addition, I think a borrower should think of the business loan, not as a transaction, but as a component of the relationship they are developing with their banker. Each business has its own unique makeup, so business owners should start their financing conversations early, allowing them to leverage their banker's expertise in crafting the financial package that best suits their company's needs. Like your accountant, attorney, and other partners, a good banking relationship provides you with a trusted advisor who can recommend financial strategies and bring other resources to bear for your business. Banks that have the vision and resources to think beyond a loan or deposit account can assist you in managing your cash flow, opening up sales to other markets, and planning for retirement and succession.
John Jepson, VP Business Banking at First Niagara Bank has over 15 years of commercial lending experience in Connecticut. He can be reached at 860-645-2504 or firstname.lastname@example.org.