Since a bank is still a business, it has to follow specific rules and regulations. So when it comes to loan approvals, one must be prepared to abide by the required loan package. Bob Roark is joined by Robin Roberts, CEO Of Pikes Peak National Bank, to discuss what constitutes such a package and how business plans differ depending on your scope and reach. They also talk about why banks favor those mitigating risks and how banking changed a lot over the years because of politics and culture.
Have you ever wondered why banks sometimes do things that are not quite clear? In this series, we have Robin Roberts. She is the CEO of Pikes Peak National Bank. She’s here to demystify some of those things. We’re going to talk a little bit in this short episode on the best practices to improve your odds and getting that loan that you’ve lived with for loan success. Enjoy it.
I’m the business owner and I’ve done a good job. I have a reasonably good relationship with my bank. We have talked about this in some other series of things not to do. In the things of to, I want to take it and do a strategic acquisition for my business. I want to put together a loan package, present it to the bank, and do everything that’s within common practices to increase the out-of-the-bank gone. I understand what you are trying to do. I can see the numbers, we are willing to take in, and be a business partner with you in this note. What can they do? I have with me, Robin Roberts. She’s the CEO of Pikes Peak National Bank. More of our series of things you didn’t know about banking but wish you did.
[caption id="attachment_5877" align="aligncenter" width="600"] Loan Package: The better prepared you are with this information, the faster the loan decision will be made, and you can get to whatever goal you’re after.[/caption]
It depends on the type of loan that you are wanting. There are some things in your loan package. They are always going to have to be there. The better prepared you are with all of this information, the faster the loan decision is going to be made and the faster you can get to whatever goal it is that you are after. If you are doing anything new, starting a new business, adding a second product line, buying someone else’s business, or expanding and opening another location, you need to have a business plan. Now, it doesn’t have to be 500 pages. The bank is not looking for you to do something that is 500 pages. If you are an existing business, you are opening a second location or you are adding to an existing product line, the business plan is a validation of your business model.
If you are a startup, you are writing a business plan to validate that the product or service that you are going to provide is needed. If you are already in business and you are generating revenue, that question is already answered. Somebody needs your product or service and you are generating revenue so you already exist. Less work has to be done on validating your business model and more work has to be done on, “Here’s how we are going to pay for the second location.” More financial projections, more talk about who the management team is going to be, what your supply chains are, and how you are going to support the new product, service, second location or whatever.
[bctt tweet="If you’re thinking about doing something big, get your tax returns filed by the deadline and don’t extend to them." via="no"]
A business plan with projections having that done before you go to the bank is important, it tells the bank what you are wanting to do, and why you think that you can pay the loan back given the revenues that are generated by whatever it is that you are going to do.A business plan is necessary, not for everything but anything new. You need a business plan, even if it’s a new part of an existing business. The banks are always going to ask for three years of tax returns. Get them together. Please don’t argue about that. We are going to ask for them. We have to have them. If it’s May or June and you haven’t filed your tax returns for last year, get them filed. It gives you a normally extended until October but now you want to borrow $2 million to do something. The bank needs to see what you did last year. We are already six months past that so if you are thinking about doing something big, get your tax returns filed by the deadline and don’t extend to them.
They are asking for three years of tax returns for whatever your business is and for anyone who’s going to sign on the loan who owns 20% or more of the borrowing entity. If it’s a business, anyone who wants 20% or more of that business is going to have to sign personally. If it’s an LLC that holds property, anyone who’s 20% owner of the LLC is going to have to sign personally. That’s also something that people should think about. Do you have someone that you are in partnership with that would own more than 20%? They are not going to put your best foot forward as you apply for the loan. We will make them a 19% or an 18% owner and don’t have them sign out the loan.
That’s a strategic conversation that anyone has with anybody that you are going to be borrowing with like a business partner. Three years of personal tax returns for anyone who owns 20% or more, and then applications, that kind of stuff, and then interim financial statements as well. Again, if we are in June of 2021, then you should be able to provide a profit loss statement and a balance sheet for your business, at least through April 30th, 2022. If you are asking for $2 million and you don’t have interim financial statements for your business, you should not be borrowing $2 million. You should be looking at interim financial statements for your business every month but some businesses do them quarterly. You could at least give March 31st financial statement. We push back on these a lot.
[caption id="attachment_5878" align="aligncenter" width="600"] Loan Package: If you’re asking for $2 million and don’t have interim financial statements for your business, you should not borrow $2 million.[/caption]
You are using your financial statement and understanding your financial statement, which is a whole different topic. That’s just your business.
We get a lot of pushback on, “I don’t have interim financial statements or my accountant does my tax returns every year.” There are a lot wrong with that. We could do three hours on that alone. The reason the bank is asking for that event to June of a year, what have you done in the first six months? The bank wants to know what are your revenues look like. For example, we are post-COVID right now, has your business bounce back from COVID? Has your business taken a hit from COVID-19 it hasn’t recovered? Has your business only survived because of government support? Are you going to be able to generate revenues to continue? The bank needs to see all of that.
If you are past the first quarter of a year, you are going to have to provide interim financial statements as well. You get all of this stuff together. Sometimes, people’s accountants provide all of it to the bank. All of this is considered a loan package, three years of tax returns, your business plan, your interim financial statements, and then any other documentation that is related to the specifics of the transaction like a buy-sell agreement if you are buying a business or a purchase contract if you are buying real estate. Those specifics to the transaction are important as well.
If it’s an industry that you have not been in before, how does a bank look at an industry-specific consultant opening on what you are looking at borrowing money for? Do they look at that favorably?
What do you mean?
In my case, I bought a storage facility years ago. I had never bought a storage facility before so I had an industry specialist come in and do a feasibility study, traffic count, all the things that are necessary and go, “What’s going to make this work? What are key things that I need to be doing and thinking about?” The bank was appreciative, at that time, for the work.
[bctt tweet="If you’re willing to spend money on a feasibility study, that shows good management and business planning." via="no"]
I would say a bank would look favorably on that. It’s part of the planning process. If you are willing to spend the money on a feasibility study that’s showing good management and good business planning, banks are in the risk business and they are always looking for mitigants to risk. If you have planned and done a feasibility study, you are mitigating risk, so that’s going to be looked at favorably.
For so many of the folks out there, a great deal of their annoyance is due to misunderstanding and lack of knowledge. They don’t know. They don’t understand that the banks have a business too. A bank is highly regulated. They don’t always get to pick the rules that they have to follow. Folks go somehow and they think banks make a bunch of money when they are running cashflow through the bank.
I hear a lot of people lamenting that banking isn’t like it used to be many years ago where you could call up your banker and say, “I need $1 million by Friday and sign for it.” No. The regulatory environment is not the same as it was many years ago. Every time something happens, particularly after the financial crisis, the public said, “We want more regulation.”
In the late ‘80s, we had the S&L crisis. A lot of depositors lost a bunch of money. If you want to look at regulations, look at some tragedy or malfeasance that happened some period. Before then, they are trying to close that additional door, so it’s business.
It’s business. It’s the regulatory environment. It’s politics because it’s generated by politics in a lot of ways. Banking is not like it was many years ago. Community banks try to keep that culture but they still have laws that they have to follow. Calling up your banker and getting $1 million on Friday, that’s somebody who has a very good and long-standing relationship with their bank. That’s few and far between.
Is it going to be a tighter regulatory environment in the future? I would be greatly surprised if it was not. Robin, thank you for sharing. I appreciate your insights. For the business owner out there that was wondering why there’s a whole series on the topics that usually plug big business owners that we have covered with Robin. Hopefully, that will help you understand why banks do what they do and develop a better relationship with your bank that helps you grow your business. Again, Robin from Pikes Peak National Bank, CEO, thank you for your time.
Community Banker with a passion for serving the banking and lending needs of small business owners. Particularly effective with businesses with gross revenues of less than $2 million annually. Can assist investors in commercial and residential real estate and businesses looking for commercial real estate. Banking executive with broad experience with management, recruitment, and the legal aspects of the business.
Volunteer counselor and instructor at the Colorado Springs Small Business Development Center, helping new and existing business owners with funding needs, explaining the SBA and small business lending process, business plan review and financial projection development, and commercial banking needs.