A Banker's Perspective On Business Loans

TRAVERSE CITY, MI — A big fear of consumers and business owners alike is applying for a personal or business loan.

It seems that many are uneasy with sharing confidential information and worry that a business plan might not look good enough through the eyes of a loan officer. Anthony Palumbo of North County Bank & Trust, Traverse City, MI, explained to MIACCA Conference attendees that there are ways to alleviate those fears.

“The first thing you should do is develop a lending relationship with a bank and understand what that bank looks for when it comes to business loans,” Palumbo said. “All too often a business owner will come in and apply for a loan without telling a banker everything he needs to know about the business.”

Knowing about a business also means knowing the business plan. Palumbo said that the past, present, and future is very important. “Your length in business tells your ability to service debt,” he said. “Your future plans are very important, too. It is important to know what you plan to do, e.g., you may be bidding on a large project and need more credit than what you might normally apply for.

“Projections are very important. A lot of research is available on how certain businesses perform and an average can be made based on these projections.”

IMPORTANT CRITERIA

Palumbo said that personal finances are the most useful information that a bank can have. “A personal financial statement is the most important data that a bank needs,” he added. “Sometimes the statement form is taken too lightly. It is very important because everything you earn flows through you.

“We will not look at a loan request without a personal guarantee from the business owner. If you don’t show confidence in your business, why should we?”

Palumbo listed some other important criteria banks consider when a business requests a loan:

The ability to cover debt. A 1 to 3 income to debt ratio is acceptable, said Palumbo; a 3 to 1 income to debt ratio will get immediate attention.

Payables and receivables. Bankers look at receivables and payables older than 60 days and will want to know what is going on and why you cannot collect or pay bills on time.

Vehicles and equipment. Equipment should be purchased with a five- to seven-year line of credit that will not last the life of the equipment. “Don’t tie up your line of credit with capital expenditures,” Palumbo advised.

The bottom line: establish a good relationship with a bank, Palumbo said. It helps in all kinds of economic climates. “Your banker is going to help you succeed, in good times or bad,” he emphasized.

“People don’t necessarily choose a bank because of its services. They choose it because of the people they know and if they can trust the banker.”

Sidebar: Consultant Explains Costs

TRAVERSE CITY, MI — MIACCA Conference attendees got some quick lessons in the “cost of doing business” from Marcus G. Metoyer Jr., president of Lansing, MI-based Omega Energy Consultants and Fay Lett & Sons Heating & Cooling, Inc.

Metoyer suggested learning the following terms:

Direct cost — a cost item that would not exist if it were not for the existence of the job.

Overhead — the expense items you encounter which are not directly attributable to a specific job; also known as an indirect cost.

Gross margin — profits remaining from sales after direct costs have been deducted.

Net profit — what remains after direct costs and overhead items have been assigned or paid.

Publication date: 05/20/2002

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