No doubt about it, there’s plenty of economic uncertainty in the world, let alone Arizona, today. But Valley bankers and those associated with the banking industry want entrepreneurs and owners of small and mid-sized businesses to know their institutions have been, and continue to be, ready to talk lending. “We’re all dying for loans,” asserts Candace Wiest, president and CEO of the locally owned West Valley National Bank.
If nothing else, bankers say, low prices, low interest rates and plenty of inventory make this an ideal time to expand a business or buy property, buildings, even company vehicles.
Yet bankers have noticed hesitancy among customers. Some won’t spend the monies they’ve been approved for, and others simply walk away before that point — they get approved, and then decline to take the next step. Whether such reluctance is tied to concern for the economic future, the upcoming presidential election or another issue, the fact remains that banks have money and are ready to lend. Of course, the new economic reality means more stringent rules are in place, but a prepared, knowledgeable business owner should be able to walk away from a lender with the extra necessary capital he or she was seeking.
“You have to get your numbers straight and know them well enough to talk about them intelligently,” says Bob Wilson of Stoney-Wilson Business Consulting in Scottsdale.
Myth: Banks Aren’t Lending
Let’s first address what bankers say is the biggest myth going these days about their industry: Banks aren’t lending or don’t have money to lend. That’s simply not true, says Ed Zito, president of Alliance Bank of Arizona, who says banks are, indeed, responding gradually to the economic environment. For Alliance, which he calls one of the leading small-business lending banks in Arizona, the proof is in its numbers. “We never stopped lending to small and mid-sized businesses,” Zito says. “We had a $65-million net loan growth in 2009. Our net loans, after pay-downs and pay-offs, grew $65 million in Arizona. In 2010, we had a net loan growth of $180 million and, in 2011, $339 million.”
Doing business as usual only makes sense, say Zito and Kevin Sellers, Arizona market president for First Fidelity Bank, because banks don’t make money unless they lend money.
“Your profits are determined by the growth and quality of your loan portfolio,” Sellers says, adding that it is interest income from loans, primarily business loans, that keeps a community bank afloat. Another way of putting it? “[Banks] love it when people buy things,” Sellers says.
Over at Desert Schools Federal Credit Union, Gary Sneed also says the myth that banks aren’t lending isn’t necessarily true. He points to the credit union’s new sales force as evidence that finding businesses in need of loans is a top priority. “We’ve asked them to get involved in the community,” says Sneed, vice president and chief lending officer, “and we’re also being proactive, contacting our business members to introduce lending.”
Nevertheless, Zito acknowledges that the lower end of the small-business segment may have a different take on banks’ willingness to lend. While he says the industry as a whole is supportive of entrepreneurs, who are viewed as job creation engines, bankers must do their part to endure this long, slow, rocky recovery. That means entrepreneurs may not be getting what they want from every bank, he says.
Says Sneed, “We still really need to be careful and prudent about whom we’re lending to.”
Banks Say, ‘Yes’; Business Owners Say, ‘Wait’
Whether they’ve heard the myth or not, business owners have not been shy when it comes to inquiring about loans. The operative word here, however, is inquiring. Wiest says the number of loans her community bank staff has reviewed — but not necessarily closed — has more or less doubled in recent times. Unfortunately, about 30 percent of loans that West Valley National Bank approves never go anywhere. She says applicants don’t follow through either because they’re unsure they can afford to go forward with the loan because of economic uncertainty or because, they say, they were just testing the waters, so to speak.
“With a certain percentage of loans that we approve, people say, ‘I need to wait,’ ” Wiest says, adding that the very same conservative comment is heard in regard to businesses that are essentially sitting on available lines of credit. “We also hear, ‘The company’s doing better than I thought it would’ or ‘I don’t want to go into debt.’”
Sellers has had similar experiences. Although traffic is picking up, and early September found Alliance funding a $2 million loan, demand is still pretty weak. “What we’re seeing is business owners are still pretty cautious,” he says.
Wiest says her customers’ uncertainty is linked to many factors, not least of which are the economy, the tenuous job market, potential tax issues on the horizon — the estate tax, for one — and the upcoming presidential election in November. Sneed also says he’s heard people comment that they want to see who will be in the White House and what the subsequent tax policies will be come 2013. He’s also heard folks say that if one candidate is elected, they’re going to invest a certain amount of dollars and if the other candidate wins, they’ll invest one-third of that amount.
Although Wiest would like to see those approved loans acted upon, she understands where her clients are coming from. She’s seen that same careful approach used by her own family with its painting business, she says. In these economic times, they are happy to pay overtime rather than add a position. That said, she believes December will be a turning point for a lot of businesses. “I think you’ll see some changes in the psyche,” she says. “Some say [the actual outcome of November’s election] doesn’t matter, but people will know what they can do.”
It’s about Relationships
If a business owner has determined it’s time for a business loan — perhaps it’s time to expand, and whoever is the next leader of the free world isn’t going to influence that decision — it’s time to do some homework. Don’t just barrel into a bank and talk to the first person to be encountered. “If I were a business owner, I’d ask for a referral for the business lender,” says Steve Jarosh, credit manager and assistant vice president for Desert Schools. It’s important to do the due diligence, and it may very well pay off. It’s a good idea to ask colleagues and friends if they’ve worked with a particular bank or banker whom they’d recommend, because a friendly introduction can go a long way.
On this point, Zito notes that Alliance views working with clients as building business relationships, not conducting business transactions. Likewise, entrepreneurs and owners of small to mid-sized businesses should do research and know what kind of bank they are looking for in a relationship, he says.
Sellers says that one of the advantages to working with a community bank like First Fidelity is that they are able to tailor an offer to a client’s needs. For example, although the bank never lowers its standards, Sellers says First Fidelity staff can make exceptions to certain policies when it’s deemed appropriate. And, he says, even when his bank’s offer isn’t the best one pitched, business owners often choose First Fidelity over a competitor because they realize they’re partnering with a bank they can work with and from which they can “really derive a lot of value.”
Preparation Is Key
Once a business owner has selected a bank to work with, she’ll get a list from the lender that includes all the documents that will be needed for the loan request package. These will include financial reports such as a balance sheet; a profit and loss statement; and information about agings, which relate to accounts receivables. Some of this may sound familiar; if it doesn’t, it’s time to learn about it. Says Wiest, “We expect you to know your business better than anyone.”
Business owners must know their numbers and have a realistic notion of what amount of money they’re going to need, says Wilson, who, along with business partner Julie Stoney, recently helped facilitate the “Access to Capital Academy” sponsored by the Phoenix Community Development and Investment Corporation. “When you know the answers, there are fewer questions,” says Wilson. Securing a loan, after all, depends on the ability to show a potential lender how the loan in question will be repaid.
Wilson notes that one of the worst things business owners can do is to come straight out and ask a banker, without providing any background information, how much they can borrow. A banker won’t have any idea. “You need to know what it is that you want and how you are going to pay it back.” So, along with having a clear purpose for the loan, perhaps the most important factor is cash flow, or the money a business is currently taking in. Back in the day, banks wanted only to see one dollar in income for every dollar of debt, but that’s another thing that’s changed in this new economy, Wiest adds. “For every dollar in debt, you have to have $1.25 to $1.30 in income,” she says, and, on top of that, a banker is going to want to hear about a “Plan B if your source of repayment isn’t there.”
In the past, Wilson says, bankers would take a look at a business’s financial statements and approve a loan on the basis of the company in question having historically done fine. Now, he says, the banks might want to look at the business’s projections for the next two years. And the extra quarter that’s required these days? It acts as a cushion, Wilson explains, “because life happens.”
Speaking of life happening, although most entrepreneurs and firms — and banks, for that matter — have taken some hits over the past few years, credit scores are still very important when it comes to getting a loan. If a business owner’s personal credit score is below 675, Wiest says, “it’s going to be tough unless there’s a compelling story behind it.”
As for those financial reports, it’s imperative that the numbers add up the way they should, that any deadlines have been met and that documents have been filed with the appropriate agencies. This may also be a good time, says Julie Stoney of the Stoney-Wilson team, to confer with a CPA or bookkeeper, the company attorney and, possibly, a business consultant, all of whom she refers to as “the legs on your stool, your advisory board.” These professionals all need to be on the same page as the business owner; they need to have an understanding of what the business has done and is doing as well as how the loan is going to be used. And they can also bring any inaccuracies or problems to light before those issues are noted by a banker, Stoney says.
Simply put, Sneed says, a business owner must make sure his financial house is in order and the balance sheets balance. Wilson makes the same point, noting that making sure the numbers are correct is “a responsibility you have to yourself” as a business owner. Stoney also urges business owners to note percentages of revenue in QuickBooks or whatever accounting software is being used; having those percentages on hand will come in handy when completing loan paperwork.
“Mainly,” Sellers says, “what we like to see is that you are currently operating at a profit, you’re a business owner with longevity, you’re maintaining a good amount of liquidity and you’re a business owner who’s responsible with your personal finances.”
Honesty about Bad Times Is Good
Of course, a business needs to do more than just have numbers that look good on paper. Wilson says a banker is going to expect a business owner to thoroughly know his business’s history and industry, the market he’s in and the competition. The bank also wants to see a business plan that states where the company is going and how it’s going to get there. Accordingly, Sellers says management’s experience will also be scrutinized, and bankers want to know that a businessperson who’s seeking a loan has an “ability to manage the company during difficult times and [an] ability to grow the company during the good times.”
And since most businesses have encountered rough times, for whatever reason, owners need to fully disclose those as well. Any decline in performance should be discussed in its entirety, Sellers says, and as early in the process as possible. “Go ahead and put it out there,” he says, adding that such admittance won’t necessarily kill a credit request. “We’ve seen and heard everything and nothing’s going to shock us. Companies have issues from time to time. What we want to hear is how they dealt with it. And, a lot of times when [companies fully disclose a potential problem], it’s not an issue anymore.”
Wilson notes that, although “surprises” cannot always be avoided, it’s never a good idea to avoid an issue, because it likely will surface later and no one, especially bankers, likes surprises. “If you surprise them, you might as well kiss that [loan] goodbye, because honesty and integrity is everything,” Wilson says. “Disclose, disclose, disclose.”
While most banks do all they can to provide a quick turnaround in processing a request for a loan, the truth is it’s not always an easy task. Banks have been instructed by regulators to tighten up the rules, Stoney and Wilson say, so there are more questions and getting a loan is a more probing kind of venture these days. Just be patient, say those in the know.
“They’re not trying to turn down the loan,” Jarosh says of staffers, who, to anxious business owners in desperate need of capital, no doubt seem like they’re taking their own sweet time. “They’re trying to make it work.”
Even in the event of rejection, all is not lost. Stoney says it’s an opportunity for business owners to learn how to do things better, so she says to ask a would-be lender what could have been done differently. “Incorporate their suggestions,” she says, “and then, when you go to the next place, you have that information.”