Q. Factors in Landing a Large Loan
I operate a small business making greenhouse equipment, which I inherited from my father. My company has about 15 employees and a small factory. I have the opportunity to expand the business and I am considering requesting a substantial loan from my local bank, with which I have done business for 20 years. This loan would be several times larger than any loan I have received from them before. The company has always repaid previous small loans on time and our credit is good. What criteria will the bank look at when evaluating my application? What would they hold against us?—R.C., Kingstree, SC
A.
If you have a long business history with your present bank, that will weigh heavily in your favor. Bank officers don’t always rely solely on the numbers when considering loan applicants; subjective considerations come into play. Your character, or their perception of it, your integrity and willingness to repay what you owe, and their general estimation of your business skills will influence their decision.
Your company’s current financial condition and its presence in its marketplace will also count heavily. Make sure your company’s financial documents are in impeccable order and have been reviewed by a CPA. The purpose of the loan and its applicability toward your business will also be scrutinized. Does the planned business expansion make sense given the market for your products? Are there larger competitors that might squeeze you out of the market? What assets does the business have to secure the loan? Are you willing to commit some of your personal assets as collateral to back the loan?
Many things can steer a bank away from granting a large loan to a small business. High levels of outstanding debt or sliding revenues are obvious warning signs to a bank. But bankers tend to probe financial statements more deeply than just revenues when considering a large loan. If your accounts payable is over-extended, or your accounts receivable are substantially late, these would be considered red flags, since it would indicate sluggish cash flow. Inventory levels might also elicit concerns, especially if your product inventories show low turnover or high back orders.
The conduct of company officers or managers may also figure into the bank’s decisions. If you personally have a poor credit rating, or your senior officers or managers do, that may influence the bank against your loan.
Q. Dealing with Deadbeats
My company has several badly overdue accounts. How should I go about collecting on these accounts? Should I employ a collection agency?—G.K., Sparks, NV
A.
Collecting unpaid accounts requires patience and persistence. Start by calling the customers. Be polite, but persistent. Delinquent customers tend to respond fastest to the most persistent requests. If you cannot reach the customer by phone, try writing a letter. Again, be professional and non-threatening. However, advise the customer that continued failure to pay his or her bill will result in further action, including the possibility that you will send the account to collection. The potential damage to their credit rating may prove sufficient to motivate them to pay.
In general, you should wait at least 90 days after the account was due, and only after several attempts to reach the customer, before engaging a collection agency. Since collection agencies typically work on commission, charging on average one third of the funds they collect, they should be considered a last resort.
If the collection agency fails to obtain payment, you can consider hiring a lawyer and suing for the unpaid bills. However, given the expense involved, this option should only be pursued in the event of a large outstanding account balance and only if you believe there is a good chance of repayment.
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