James Cormier, First Vice President Commercial Banking at PeoplesBank shares information to help business owners understand what banks are looking for when reviewing requests for loans.

Whether you are starting a new business or expanding an existing one, growth will always put a strain on your cash balances. Your local bank can help you manage your cash while allowing your company to continue its path forward by providing credit to: purchase a new piece of equipment; expand your operating space; purchase a new location/building; or fund increasing operating expenses through a line of credit. Being prepared to obtain financing from your bank will be a necessary part of the process. At its most basic level, commercial bankers follow these five criteria when deciding to lend your business money.

Capacity

This refers to your business’s ability to repay its debts. Banks look at your income statement and balance sheet to determine the amount of cash available to pay (or service) your total outstanding debt. When applying for a loan, it’s imperative that you have up-to-date and accurate financial statements. Banks will always make sure your company can afford its current and proposed debts first and foremost. Having a CPA handle your year end taxes and a good bookkeeper keep track of your day-to-day operations will help you properly manage expenses, increase profitability, and ensure that you can obtain credit.

Conditions

Multiple factors apply to this category including the purpose of the loan, the condition of your business, your business’s overall industry, the local economy, and the national economy. A commercial lender will need to understand your request in as much detail as possible in order to properly structure the loan and offer you the best terms possible.

Character

Simply put: can the bank trust you to repay your loan. And in the unlikely event that something goes wrong, will you be there to work through any problems. If you own a small business then most likely you deal with a local community bank. And if you don’t, you should! Community banks will put more emphasis on building a relationship. When a community bank knows you and your business are consistent and trustworthy it can be more flexible and offer you better products and services. The bank is in the business of managing risk; the more you can show the bank is not at risk of losing its investment in you, the better for both parties.

Capital

Commercial bankers often describe capital or equity as “skin in the game”. Banks want to see that you have your own capital or equity into a project or asset purchase and the bank is not taking on all the risk. Providing your own capital shows the bank that you are less likely to walk away from your debt obligations and lose your personal investment.

Collateral

Collateral is used to secure a loan and can give a lender some protection if a borrower defaults on its obligations. The collateral is often the subject of the borrowing request: equipment loans, for instance, are secured by specific equipment, and mortgages are secured by real estate. Secured loans are typically considered less risky for lenders. As a result, loans secured by some form of collateral are generally offered with lower interest rates and better terms compared to unsecured financing.

Your bank is here to help you reach your goals, but we are only as good as the information we know. Be upfront with your lender and be prepared to provide as much detail as possible. A good commercial banker should be an integral part of any business owner’s advisory team along with a CPA designated accountant and an attorney. The more we understand about you and your business will only help us provide you with the best experience possible.

PeoplesBank works with local businesses, big and small. We believe local businesses fuel growth in our surrounding cities and towns. For more information on how PeoplesBank can help your business, contact one of our Business Bankers or Cash Management Officers.