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Can I get a loan for my business? Local facts on commercial lending

MEAGAN HILL   Jul 12, 2010 1 COMMENTS

Recently I've met with the commercial lending representatives from banks in Jackson Hole and Teton Valley, Idaho, to ask the question, "What are the lending rules today for small business owners in our region•"

Before I answer the question, I first need to establish some definitions and offer some important points about today's lending market.

Terminology: There are three key terms used in commercial lending the one must understand before approaching a bank.

LTV: Loan to value ratio

This is the value of the money the bank will lend against the overall value of a property. Commercial lenders will keep this ratio low conservative to make sure that you don't get in over your head. (Typically much lower than a residential loan).

DSCR Debt service credit ratio

Commercial lenders use this tool to measure and manage risk. Think of it as insurance for your loan. The Bank wants to see that you have enough money left after you've paid all your bills (including yourself), to pay back the debt. DSCR can range from 1.25 (low risk) to 2 plus. At a ratio of 1.25, the bank can see that you have enough money to pay back the debt, and have 0.25 left over. This 0.25 is the safety factor built in to guard against default, just in case you have a slow month or an unexpected business expense.

SBA Small Business Administration

SBA provides loan guarantees to banks on behalf of qualifying small businesses. SBA loans can drop the down payment needs to 10 percent for certain types of loans.• For more information, go to https://www.sba.gov/financialassistance/

Preparation: Before you approach banks, there are a few items that you need to attend to.

No. 1• Relationship, relationship, relationship

All banks value the relationship you have with them so make sure you get to know your bank representatives well before you request a loan.

No. 2 Financial statements

It is essential to have three to four years of financial statements to give the bank an understanding of the business history/profitability over time. The commercial lending manager at your bank understands that the last year or two will most likely look worse that the preceding years. This is not a deal killer, the key is to have realistic expectations of your future projections so that you and the bank can manage business risk and be successful together.

No. 3 Income tax returns

Banks want to see your last three to four years of income tax returns, just as they would review financial statements. Make sure your paperwork is up to date.

The numbers you need to know: As you crunch your numbers to see if you can make an acquisition work, here is a broad outline of the standards you must meet in today's commercial lending market.

Credit score

700+

Plant + equipment

0%+ minimum down-payment on leases up to $75,000

3.99%+ interest rate

Businesses/real estate

20% minimum down-payment (more likely to be around 30-40%)

1.25 minimum DSCR (more likely to be around 1.5)

~7% Interest Rate

5-7 year Term with interest payments amortized over 20 years.

Remember: This is a broad outline. The numbers will vary by bank, by relationship and by performance/risk.

So, can I get a loan for my business• The answer is a resounding YES from our banks.