NFIB

The Loan Moan
08/ 20/ 2003

by Carol Wissmann

When applying for a loan, the perception remains; a banker's desk appears like a looming Mt. Everest, and the lending officer sitting behind it, an Indomitable No-Man, standing between you and the vault.

Still, as Susan Moblo, a vice president of commercial banking for U.S. Bank, points out, banks make money on loans from interest or fees. So assuming they're as eager to lend money, as you are to acquire a loan, what are the necessary prerequisites to bring banker and borrower together?

Though Moblo typically works with companies from $5 million to $250 million in revenue, she sees a line of credit (LOC) as a necessary primary facility for any sized business.

"It's a revolving instrument, much like a credit card," Moblo says. "You're approved only once and can draw on it when you're short of cash or for working capital, often by simply making a call or writing a check."

The size of your line is based on your company's cash flow, and is decided by how much the bank determines you are able to pay back each month. A large LOC is often secured by collateral, which is typically computed on 75 to 80 percent of accounts receivable and 50 percent of inventory, often adjusted by the type of collateral provided. Smaller lines of credit, in the $50,000 to $100,000 range, may be unsecured.

Since payable aging indicates past promptness in bill paying, Moblo sometimes requests aging statements for both accounts payables and receivables. Receivables that are outstanding for more than 90 days are generally ineligible to count as part of the collateral base, and are sometimes viewed as uncollectible. Payable aging indicates past promptness in bill paying.

For established companies, small credit lines of $10,000 to $50,000 often require no more than a simple one-page application, with no financial statements or tax returns necessary. On larger lines, Moblo asks for three years of both financials (balance sheets and income statements) and business and personal tax returns. She prefers to use financial statements over tax returns, as items such as depreciation can be added into cash flow, giving the borrower a stronger position.

Start-up companies need to supply a business plan addressing items such as their market niche and mission, strengths and weaknesses, and financial statements with a starting balance sheet and a projection of what it will look like in a year.

Besides the above requirements, term notes or real estate loans need to be appraised to establish the value of the collateral. Term loans differ from lines of credit as their rates are generally fixed and for a longer period of time. Monthly payments are amortized and include principle and interest. LOCs typically have variable interest rates for shorter durations, such as twelve months.

While bankers may sometimes be viewed as unsympathetic to small business, Moblo explains that it is in the business's best interest to let bankers make the assessment. "It's irresponsible for me to lend money you can't pay back," Moblo says. "That's why we do what's called 'due diligence' in underwriting. We have an obligation to borrowers not to place them in a position they can't afford."

If you're wondering how you compare with others in your industry, check "The Annual Statement Studies," published by The Risk Management Association (RMA), a Philadelphia-based banking trade group. Available in many public libraries and for purchase at www.rmahq.org, it details balance sheet and income statement information by sales size and industry.

Besides comparing your company with what's typical for your industry, Moblo also considers time in business. "If you've only been in business two years, you haven't experienced the ups and downs of various economic cycles," she says. Correspondingly, she considers management experience, preferring background in the same or similar industry.

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