How to approach the bank when you need a loan
Here's the situation:
• You have a small business checking account at the bank, probably the same bank where you've had household checking for years.
• When you're at the bank and happen to see your banker, he (or maybe she) nods and waves, but that's about the maximum interaction.
• Now your business needs some financing. Where do you turn?
That's the scenario painted for Will Grosch, a veteran commercial lender who is senior vice president at Glen Ellyn-based Community Bank Wheaton/Glen Ellyn. (To complete the identification, Community Bank is in the early stages of being purchased by Wintrust Financial Corp., a Rosemont financial services holding company that owns 15 bank charters.)
What do you do?
"The first thing is to get organized," Grosch says. "Identify why you need external financing. Are you looking for short-, intermediate- or long-term debt?
"Working capital needs? Inventory financing, which probably is a line of credit? Trucks and equipment, intermediate-term? Buying a facility, which would be longer term?
"The key thing in my mind when a business owner asks for a loan: Have they clearly identified what they need, how the loan will impact their business and how it will be repaid?"
What Grosch wants is for the potential borrower to be able to explain the business' need for financing and display an understanding of the numbers. "I highly recommend that the accountant go through the software. They're professionals. They'll make certain things are presented properly.
"We start to get in trouble when the owner doesn't understand the numbers," Grosch says. "'Receivables? Yeah, I need to clean those up' is not a good thing to tell your lender."
The potential borrower "must prove the business' finances are in order," Grosch says. "I want to see the corporate tax returns - federal, not state - and all the schedules for the past three years. I want to see the internal books - QuickBooks is OK - ideally the last two year ends, side by side for comparison."
If you're the hopeful borrower, be ready to explain any differences or large line items.
Grosch will scrutinize the business owner's finances as well and will require a personal guarantee - which, he says, "typically is not collateralized."
Grosch suggests talking to "two, three, four different banks. Different sizes, different characteristics. Community banks are more likely to do a loan that doesn't quite fit in the box.
"If you're doing international trade or out-of-state business, you'll likely need a bigger bank.
Experienced bankers often can OK loans to a preset limit. Other loans will go to a committee, sometimes the Board, for approval. Some approvals, or denials, will come from a centralized, out-of-town lending center.
There's no one best approach - except, as Grosch says, for potential borrowers to be able to explain company finances, and how the loan will be used and repaid.
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