What Do Banks Look For?

The next time you are looking for a loan this article may help you in understanding what the bank is looking for in order to make you that loan.

If you are to be successful in building a lifetime relationship with your bank the first thing you must do is learn how to organize your financials properly and manage your banks expectations.  Bankers and business owners differ in the way they view the world. Let’s look at a few areas where both differ.

Attitude toward risk     – Business owners (BO) are risk seeking, banks are risk adverse.

World view                   – BO optimistic (focuses on upside), Banks are Pessimistic (Downside)

Education                     – BO usually sales/production, Banks a finance/accounting

Regulatory                   – BO very little, Banks are heavily regulated

So you can see right off that there are distinct differing viewpoints between borrowers and banks. The bank will want to know the ownership of your business. Is it a simple or complex structure where it’s difficult to understand with hidden risks? How are decisions made? This is important because the bank doesn’t want to deal with many decision makers where conflicting issues may develop. Who are the Professional Advisors, CPA’s, Attorney’s, Board Members and other Consultants?

The bank will want to know how you report your business results. Audited, Reviewed or Complied Financials or Tax Return prepared. Each method carry’s a different level of credibility to the bank and each is viewed by the bank differently in making a loan. The big three is still here to stay. Collateral, Cash Flow and Financial Strength!  All three are examined under different rules and may determine the amount of the loan a bank is comfortable in making or allowed under statutory regulations. Will you guarantee the loan personally? If not then any bank will most likely look upon this as the owner not having faith in his own business. Right?

What are some red flags for a bank? No budget, poor credit score (why? If you don’t pay your own personal bills its likely you won’t pay a bank debt – barring certain circumstances), you don’t understand your own numbers (oh yes, this occurs), tax income very different than book income (i.e. two set of books), you refuse to guarantee the loan, poor management team, too rapid growth and expansion, inability to provide periodic, timely accurate financial information.

This provides only a microcosm of what the bank will look at and get into when you ask about a loan. But it gives you a general idea what you are up against. The bottom line is do your homework and get qualified help to prepare you properly before your approach the bank.

 

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