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Insights: Commercial Lending

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Own a business? Earlier, we gave you an inside scoop from a lender’s perspective. Whether you’re just starting a company or renewing a long-time loan, here are a few more tips on what lenders need from you. We’ll also give you a look inside the industry and what types of loans we’re seeing this year.

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How to secure a commercial loan: a lender’s inside scoop

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From bakers and brew masters to dentists and doctors, all business owners have one thing in common – they all need money. That fact is true regardless of the stage: starting, expanding or continuing their operations. Securing financing for a business can be one of the most overwhelming tasks an entrepreneur will ever face.

Lenders ask the same questions and look at certain criteria when evaluating loan requests no matter the amount of money a business owner needs.

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What’s the Plan?

Lenders want to know how much money will be personally invested in the business, how much money the creditor is being asked to fund and how the money will be used. For a startup company, you will need to present more than the basics. You’ll need to show a business plan, giving the opportunity to answer the aforementioned questions as well as the following:

  • Who will own and operate the business?
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  • What experience and/or qualifications do you have to operate the business?
  • What will the business sell/provide?
  • Who is your target market?
  • What is your marketing plan?

For a company that has already been in business two or more years, lenders will require current balance sheets, profit and loss statements, and interim balance sheets. It’s a good idea to bring personal tax returns and financial statements, as well.

Money Makes the Business World Go Round

Once the lender has reviewed your business plan and expertise, they will move on to the money. For a startup, the first question a lender will ask is how much money is needed to start the business and make it profitable. Think about working capital such as inventory, real estate, equipment and furniture.

The next question is how much money will you personally contribute to the business? Actual cash investment by the business owner is necessary. An existing business will need to present its current balance sheet to demonstrate how much has already been invested and how the money was spent. All of this information will be reviewed to determine how much actual cash investment remains after paying out expenses and providing a living for the business owner.

These questions will be evaluated by the lender to determine if the business will operate soundly, that the debt burden does not place unreasonable demands on the profits of the business to repay the debt, and that you have enough capital at risk to keep you committed to the success of the business.

The Payment Terms

The biggest challenge business owners face when seeking a loan is showing the lender how and when they will pay the money back.  This is the chance to prove to the lender that your earnings will be enough to repay the loan.

To accomplish this goal, existing business owners should bring historical operating statements to showcase prior sales, expenses and profits. If you’re new to this, provide projections of sales, expenses and profits for the next two to three years, and an annual budget of cash expected from sales. Industry and market research data can serve to back up your projections.

Borrowing money is all about convincing the lender that you have the capital needed to succeed, the ability to repay the loan, the character and skill to implement the plan and the collateral to serve as backup. When entrepreneurs clearly understand the process and questions a lender will ask, they are adequately prepared to go out and secure a loan that will help their business succeed.

For more tips to prep you before your meeting with a lender, check out this earlier blog post: The 5 C’s of Credit.


Michael Rosales is senior vice president and small business banking manager at UMB Financial Corporation. Mr. Rosales joined UMB in 2005 as part of the founding crew of the Small Business Banking Department. He manages a group of associates who process requests for small business loans. Mr. Rosales can be reached at Michael.Rosales@umb.com.



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Community banks are the lifeblood of their communities

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There has been much discussion and debate recently about the role of community banking in America.  In fact, I read with interest a recent article in the Wall Street Journal, “Tally of U.S. Banks Sinks to Record Low,” which compelled me to write this blog post reaffirming our support of these banks.

The article points out that the number of banks has dramatically decreased to 6,891 as of September 30, 2013. The reasons for this decline are varied.

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On one side there are changing demographics, and the challenges smaller, more rural communities face while simultaneously trying to prosper. Not to mention the impact of rapidly changing technology and accelerating costs.

On the other side, persistently low interest rates and a difficult regulatory environment have made the business of banking more challenging. Clearly interest rates will return to a more “normal” level at some point, and our hope is that regulators find proper balance as we move forward.

So, you may be wondering, what does this all mean for the banking industry? Opinions have varied greatly as to whether a reduction in the number of banks is a positive or negative trend. There also have been various viewpoints on the impact it could have for community banks, given the large number represented in the decline. This in particular is the point I would like to address.

UMB has been offering Correspondent Banking services since 1928, and we currently work with more than 1,000 community banks. Because of our relationships and experience in this area, we know firsthand the value they provide and the part they play in not only our industry, but in their communities as well.

We understand the critical banking and financial needs community banks address within their communities, and we are firm in our convictions that the community banking model works. Our company has always been an advocate for community banks that serve their local communities, businesses and citizens, often providing services larger banks are frequently unwilling to extend.

We know that banks are the lifeblood of their communities. As such, having community banks solidly positioned with the services required to fulfill their mission of growing and supporting their communities is crucial to the long-term economic health and vitality of their communities. It is also essential for the future of banking—and we will continue to be here to support community banks in their endeavors.


Mr. deSilva is president and chief operating officer of UMB Financial Corporation. He is also vice chairman of UMB Bank, n.a. Mr. deSilva joined UMB in January 2004. He is primarily responsible for UMB's fee-producing business units and product lines, including Scout Investments; UMB Fund Services, UMB Healthcare Services Payment Solutions, Prairie Capital Management. Additionally, he is responsible for all corporate operations, technology, properties, security and marketing.



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The Five Cs of Credit

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Are you an entrepreneur looking to start up a new boutique or local restaurant? Or are you an owner of an established firm seeking to expand or upgrade? Either way, securing financing for your business is sometimes an overwhelming process.

UMB has a long history of being prudent in our lending. We don’t want to put our customers, or ourselves, at risk, so we follow a sound underwriting process to ensure we are making the best decision for everyone involved.

Here are some common guidelines we use when it comes to the loan process.

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Character

This is the overall impression you make on the banker. Business experience and educational background will be evaluated, along with references and past experience.

Word of Advice: You need a business plan. Be open and honest – you should provide the most accurate and objective information about the business and industry landscape.

Capacity

You will need to detail exactly how you plan to repay the loan. Business cash flow, repayment timing and likelihood of repayment will be considered, as will payment history on your current credit. Financial partners need to have confidence that your business will generate enough cash to operate and sustain the company.

Word of Advice: Prepare to have money set aside for a down payment.  Don’t come to the table empty-handed.

Capital

This is the money you have individually invested in the business and is used to assess your risk should the venture not succeed. It’s important for you to demonstrate a personal financial commitment before seeking third-party funding.

Word of Advice: Financial institutions generally require that at least one-third to one-half of the business be funded with your money.

Collateral

This is where assets you own are pledged to the lender as a secondary source of repayment in case the loan is not repaid. You also may be required to sign a guarantee with the promise to repay the loan if you cannot repay it with the profits from the business.

Word of Advice: Most banks will expect the collateral assessment to be greater than the loan amount.

Conditions

This is the outlined plan for the loan, with details on how it will be used and for what purposes. Current economic and business conditions for all industries, as well as your business’ specific industry, will also be evaluated.

Word of Advice: Have a strong knowledge of industry trends, both nationally and in the local market. Timing can be critical.

You should pick a financial lender that will be your partner, not just your bank. After that, securing a loan to start or grow a business should be a smooth process and you’ll be well on your way to fulfilling your dream!




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