Euro Crisis Drying Up Small Business Credit? Give Your Business Every Advantage in Applying for Credit.

Big banks are back in the spotlight. The Fed's new "stress testing" focus includes evaluating bank exposure to Euro debt. As banks limp along, getting a small business loan is increasingly difficult. However, small banks approved 44% of small business loans in 2011, compared to big bank's abysmal rate of only 10%! Read the article.

You should have every advantage available when applying for and negotiating favorable loan terms for your small business. Knowing what your loan officer is thinking, allows you to gain negotiating power.

Time is money. The last thing your loan officer wants to do is go 50% of the way to loan closing and then fail to close the loan. If you have a credible loan request it goes to the top of the priority list. Start with an in-depth conversation about your business.

Credibility Stems From:

A) Being organized - Your loan documents can't be prepared without a copy of your organizational documents (articles) and financial statements - have copies readily available.

B) Understand the parties involved - Do you have other creditors? Do you plan to obtain additional financing from other creditors at a future date? What collateral is available? Are there third parties who will need to sign pledge agreements or authorize the financing? Banks don't ever want to end up in court and they don't like to be surprised. And usually when they are surprised they have an out. It's buried in those pages of documents. I know what you're thinking...But I have an attorney to review documents! (read on).

C) There are two types of banks: those with standard documents (no negotiating of loan documents allowed) and those utilizing the services of outside counsel (this will cost you). You should know which type of documents your banker is proposing. Typically, standard documents will save time and money and will work for most financing transactions unless you have unique business circumstances.

Once you have established credibility with your banker, the balance of power shifts to you. Your banker is trying to get your loan request approved with the credit authority. Ideally, minimal new questions turn up at this point. Lots of new questions signal you and your banker haven't covered all the bases, which means you don't have an empowered advocate inside the bank. As your credit request moves forward loan terms will become the primary discussion point.

Obtain Favorable Loan Terms:

A) Get it in writing. When your banker puts an interest rate or loan terms in writing it becomes a commitment. Written offers to lend are not subject to the whims of internal bank staff. A written offer usually = legally binding offer.

B) Consider loan covenants and loan terms and ask how the bank arrived at these conclusions. Are they realistic for your business? The last thing you need is a default letter 12 months down the road as a result of unreasonable expectations.

C) Offer information and seek to understand how the bank's risk position can be improved. Can you offer guarantor support? Are you bringing deposit accounts to the bank? Pledging liquid assets and providing a control agreement makes any loan look better to the bank.

Give yourself every advantage. Know your business's financial strengths. If there are weaknesses, anticipate the bank's potential concern and try to offer risk mitigating factors. And know when to get in writing. The closing table is long way off, but at a certain point your prospective banker should issue a written commitment that you can rely on for business decision making. Like any other business transaction, a certain amount of transparency and ability to recognize the counter-party's perspective paves the way to obtaining bank financing.

Getting an approval for new loan funds will not be easier in 2012. But at least you now know what your banker is thinking.