Need A Loan? Then Know The Answer To These 3 Questions!

My career in banking has spanned over 30 years and in that time, I have had a lot of people pitch me about their business idea or potential real estate investment so they could get a loan.The problem is, the vast majority of these folks want to sell me on the vision of their dream vs. telling me exactly what I need to know to determine whether or not I can lend them any money.So I sit and patiently listen while they tell me the origin story of their dream and how they arrived at this moment to apply for a loan.

Sometimes the story is interesting but a lot of times it is a repeat of the same story I have heard numerous times and, besides, all I really want them to do is cut to the chase and answer the BIG THREE Questions:

1.How much money do you need to borrow?

2.How much money do you have to put down?

3.What do you propose to use for collateral?

Banks are in the business of lending money but, as I tell everyone who is looking for a loan, the easy part of my job is lending money.The hard part is getting it back.

Based on decades of experience, and knowing what the bank is looking for in a borrower, it is not difficult to slice through a pile of loan requests and separate the winners from the losers.I have always found a quick “no” is better than a long, drawn-out “maybe” that generally ends up as a declined loan down the road anyway.As long as you can be truthful with folks and tell them exactly what the problem is and what some potential solutions are to fix the problem, they tend to react more favorably than someone just telling them the “loan committee” declined their loan request.

Folks might be surprised by the number of people who come to talk to their potential banker to apply for a loan and they don’t even know how much money they need to borrow.Truthfully, they are looking for the bank to tell them how much they would qualify for (because people will borrow as much as a bank would be willing to lend to them) and they fail to prepare for the inevitable question from the banker (“How much money do you need to borrow?”)

Generally speaking, if someone is buying real estate or equipment, they know the answer to that question.But if they are applying for a working capital line of credit, they have no idea how much to ask for.If it is a new business, the borrower has a difficult time pinning down exactly how much of a loan they should apply for.But that is precisely what the bank is looking for.How much do you need and what are you going to use the money for?

If someone has the first question nailed down, the next hurdle is the amount of money they personally need to have available to invest in the project.There are no 100% bank loans available so there needs to be some of the borrower’s own cash in the deal.The rule of thumb for most bank loans is the borrower needs to have 20% of the total proposed project cost in cash and there are some programs (to finance owner-occupied real estate and fixed assets) that only require an equity contribution of 10% down.

So when you go to the bank looking to finance a project that will run $250,000 you better be prepared to show the bank you have access to $50,000 (which is 20% of $250,000) to invest in the project or your loan request will be rejected before you even walk out the door.

Finally, the bank is going to want collateral to secure the loan.When you are buying real estate or equipment, for example, this is not a big problem.The banker can connect the dots between the loan and the use of proceeds to see what is available for collateral.

The picture gets a lot fuzzier if you start to complicate the situation by asking for a loan to start a business, buy an existing business, fund purchase orders, get additional working capital, or finance “good will.”In these cases, there are several options the bank can use to secure the loan but it can be a frustrating process if the borrower is kept in the dark.

Each bank can have a different appetite for various types of loans and there can be a bank that likes certain types of loans and another bank that will rarely make the same loan if it is not in their wheel-house.A good example of this is business lines of credit or unsecured loans.A lot of banks do not like doing anything unsecured and other banks are not set up to properly monitor the collateral used to secure a line of credit which is generally accounts receivable and inventory.

To greatly improve your odds of success, it is better to walk confidently into the bank with the correct knowledge to answer these big three questions so you can walk out of the bank with a loan approval to purchase an investment property, start, or grow your business.