Understanding Business Loans with a Business Banker

Getting a business loan can be intimidating, especially for first-time owners. Cultivate sat down with Vinton County National Bank to get you the answers to questions you might be hesitant to ask. 

Topics include: 

  • How is the loan process different at a community bank versus one of the giant banking institutions? 
  • How much of the final loan decision is computerized versus considered by actual bankers that discuss the loan together after reviewing all of the financial details?
  • How many years in business are usually needed to get a business loan and why? 
  • How does the type of loan matter for the use of the loan funds, such as if I’m trying to get a loan to purchase a commercial property versus trying to get a loan to renovate a leased space?
  • What are you looking at in the business and personal tax returns? Are you looking at a few key numbers or digging deep? For instance, are you looking at things like depreciation that is reducing net income but doesn’t impact cash or principal payments that impact cash but not net income?
  • What are the key metrics that a bank is looking at to evaluate capacity to repay the loan?
  • Generally speaking are these metrics less stringent on an sba vs bank loan 
  • What are the differences between a loan from your bank versus an SBA 7a loan or an SBA 504 loan?
  • What do you think are some of the more unexpected parts of the loan process for a small business that is doing this for the first time? 
  • How long does the loan process usually take? How is that different with an SBA loan?
  • Why do banks usually insist on maintaining accounts? Is it more than just the fees and income they earn from deposits?
  • How do banks use your credit score when determining if they will give a business loan? What difference does a 650 versus a 750 or 800+ make? What does this really tell you?
  • What is a personal financial worksheet and why is it important?

Click here for business funding assistance and a free advisory consultation, and find Vinton County National Bank here.

Video Transcript

Introduction

Matt: I’m Matt Yerkes from Cultivate and we’re here today to talk about business banking. So I have with me here, Roger from Vinton County National Bank, known locally in Grove City as the Franklin County Banking Center.

So Roger, what do you do with the bank?

Roger: Well, thanks for having me. I’m a commercial lender for the bank. I’ve been in the business since — don’t wanna date myself — probably since the late nineties.

Matt: Okay. Well, thank you very much! We’re gonna ask you a few questions today trying to help our members and the people watching this video just to better understand what to expect when getting a business loan.

Roger: Sure I’m looking forward to it.

Community Bank vs. Giant Banking Institutions 

Matt: Roger, the first question that I have for you is — Vinton County National Bank is a community bank, and can you help us understand how is the loan process different when you’re working with a community-based bank versus one of the large regional banks? Is the process more computerized with the really big banks versus with more human processes with the community banks?

Roger: Sure! Well with the community bank, at least, with our bank, the lender in a particular area was in the area — members of the association of the area. So they really understand the area that they’re lending in, and as a lender, we have our own credit limits. So someone comes in and says they need a loan for this purpose — I know who they are. I know where they live.

I probably ran into them with the chamber meetings, so we really get to know the customers that we deal with, versus a bigger bank you may be dealing with somebody who’s in Chicago, who doesn’t know the layout of the land here in Grove City, for example. See — that’s the main advantage of working with the community bank.

And another example is — if you look towards the whole COVID-19 pandemic that we’re in, we had the SBA PPP loan for payroll. The community banks, if you really look into it did the majority of the loans. They may not have been the biggest loans but we did the majority of the loans as far as number wise, and it really helps if you said that community banker you have that relationship with them.

They could call you up. They could ask questions, and they didn’t have to get a voicemail. They actually get a hold of me.

Community Bank’s Geographical Loan Restrictions

Matt: As a community bank, are you restricted from doing loans outside of a particular geographic area like outside of a certain county, or outside the State of Ohio? Or are the restrictions really more just because more of a practical nature like because they’re just outside of your service area.

Roger: As a community bank, we like to stay within our community. Of course, with that being said, l can’t speak for every bank. But our bank, we like to lend where we have a branch in the surrounding counties. For Vinton County National Bank, we have a presence around here in Central Ohio.

So, all of the Ohio counties, and if you kinda picture the 33 corridors and the 23 corridors, all the way down to the river, that’s kinda like our footprint. Basically, we like to stay within the surrounding counties to where we’re located and not really go beyond that.

The other practicality of it is, you don’t really know the other areas. l really know nothing about the Toledo Markets, so why would you wanna go to the Toledo area. l do know about Central Ohio — so that’s kinda like where we wanna stay and know your market.

Business Loan Qualifications

Matt: How many years in business do you usually look for when a company is applying for a loan? How many years in business do you usually look for, and why that link in terms of business?

Roger: Typically, we like to see at least two years in business, however, there are exceptions to all that. l think the Bureau of Labor of statistics shows that 21% of all businesses fail in the first year and 30% of the businesses fail in the second year. So, we like to see two years of tax returns.

Another belt, to see what kind of cash flows that they’re generating. Now, l said there are exceptions made. For example, right now, I’m doing a loan for a gentleman who is buying a franchise for a robotic company. He takes them into schools and they’ll build the robot. They’ll program it, and kids can be playing with these robots within an hour after he arrives.

Now, the reason why I’m saying there are exceptions to that — he’s also a 28 year computer teacher for New Albany. So, he’s got that experience behind him. He’s been doing this part-time for the last three years for a different company. And so his family is ready to buy his own franchise.

So right now, I’ll be looking at doing a loan for him. He hasn’t even started his business yet to buy that franchise. So there, typical, it’s two years — but there’s always an exception to that rule.

Types Of Loans & Loan Funds

Matt: Roger, l think one of the questions that entrepreneurs often have — they have an idea that they’re gonna go to the bank and get a loan. And they view it perhaps, at first that they’ve never done that before. They view it as a really very general loan like they’re just gonna get 50,000 dollars to start their business.

And they don’t often realize and understand what they’re gonna use those loan funds for, is gonna really impact either ability to loan and even who they would go to and get that loan from? Can you help us understand why what you’re gonna use the loans for makes such a big difference in getting a loan?

Roger: Sure. There are several types of loans out there. Of course, there are loans to buy commercial real estate for your office space. There are loans out there for working capital which might be a revolving line of credit, and that’s what absolutely busts down to what’s the security on the loan.

So, if it’s commercial real estate it’s something you can physically touch, you know. You can see the building. You know exactly what you’re lending on. Whereas if you’re lending on for operating lines of credit— you really don’t get to see all that you might see. Accounts receivable would be security or maybe other business assets. Might be the security, but you never really get to see that.

So typically, on commercial real estate loans, you can have a longer amortization on your loan. Whereas, on working capital, typically, if it’s a line of credit. We typically renew those on an annual basis. So, we just can see how you’re handling it. So, we like to see a paid out, for example. We like to see a paid on zero if it’s for operating capital at least for 30 days sometimes during the last 12 months.

Business Assets

Matt: So, like as a follow up to that question, if I was an entrepreneur that was trying to get a loan to buy a piece of commercial property — that’s one scenario, another scenario we often find is they need money for leasehold improvements and how does the bank look at that type of loan differently? Where they’re gonna be spending all that money on these leasehold improvements that maybe would not really belong per se to the business itself that might be something that’s gonna be altering the property that benefits the business but are not necessarily an asset of the business.

Roger: Well again, we kinda look at the business assets. So, we may not take the leasehold improvements as security. Perhaps the business has other assets that we could use as security again — accounts receivable, inventory, cash in the bank, things on that alike. 

Matt: When it comes to banks making a loan, l know that some banks will keep those loans and service them for the life of the loan, while others will sell those loans, and wanted to know what a community bank like yours do you typically do?

Roger: Well, typically on conventional loans we retain those services ourselves so you’ll be making your payments directly to our bank whether it be commercial real estate or an operating line of credit like I spoke about earlier, now as far as SBA loans go, there are two different main types of SBA loans, one is called the SBA 504 that’s usually on real estate it’s a 50/40/10 think of it that way, you put down 10 percent we make two loans one for 50 percent one for 40 percent once you move into that property the SBA will come in and take out that 40 percent from us, and we retain that  50 percent loan on our books, but yea you’ll be making payments to the SPA on the 40 percent, the second type of SBA loan that’s out there is called the 7A, that’s where the banks receive a guarantee for that loan, that guarantee can be anywhere from 50 percent almost to 80 percent sometimes a hundred percent on certain loans. Some banks will sell-off that loan that guarantees low as a premium, we do not like a bank we retain all that but that is always an option there are some farm loans or egg loans that we can sell off there on farmer mac but we typically retain those as well.

Bank Evaluation & Key Metrics

Matt: So know every time we go apply for a loan with a bank we’re gonna have to provide our business tax returns and our personal tax returns for several years, and can you help me understand are there specific things that you’re looking at in those tax returns, like how deep do you dig into those tax returns or are there just really a few key pieces of information that you’re gleaning from those

Roger: Typically what we look for in personal and business tax returns is cash flow, and then we drill that down to global debt service coverage. So in a nutshell we look at “can you pay your bills?”, and “can you afford this payment overall?”. And it’s not rocket science, I mean, that’s what we’re looking for is cash flow then global debt service coverage, we typically like to see a 1.25 that’s service coverage ratio or larger, and what that means is we take your total income total cash flow divided by your current debt we like to see that’s basically it’s saying “you can pay for your debt” once over plus a 2.5 over each on that, and then we also look on your personal financial statement in addition to tax returns, a personal financial statement, in a nutshell, it drills down to your net worth, you list all your assets, you list all your liabilities we look at both and we come to like if we liquidated everything today how much would you have leftover?” We like to see a positive net worth.

SBA Loan vs. Conventional Bank Loan

Matt: So thanks for explaining to us all of the different things that you’re looking at in our financials, how does that process differ if it’s an SBA loan versus a conventional bank loan?

Roger: With an SBA loan there’s a lot more documentation needed versus a conventional loan, so they’re gonna want to see not only tax returns, but three years of profit loss or income statements and balance sheets I typically if l have the tax returns l don’t need that, so right now we’re in the time of year where a lot of people might be on extensions for 2019 tax returns, so that what l would ask for is then the 2019 income statement and balance sheet, along with the 2020 income statement and balance sheet, SBA loans I’m not gonna say they’re easier to get sometime if we’re doing a 7A loan, like I said, you have that guarantee sometimes it helps the bank to  feel more comfortable with making that loan if they know they have a 50 percent or 75 percent guarantee or on the 504 loan you’ll have to put down 10 percent now that sounds like that’s a great thing but just keep in mind 504 loans you’re probably looking at 3 to 5 percent in fees for that loan, the good thing is they let your finances inside the loan or you’re still paying a lot more in fees for the SBA.

Unexpected Parts of a Loan

Matt: Roger what are do you feel are some of the things that are unexpected for a business that’s applying for a business loan for the first time, what is like kinda the parts to that process that are unexpected is it have more to do with the kinds of financial information they’re gonna have to provide, is it how long the process takes, or there an unexpected cause that they’re unaware of, is it how much money they have to have down for the loan what are some of those things that are most common, like misconception or just things that are unexpected to the small business owners

Roger: Sure, probably has to do with the personal financial statement. As a small business owner, go to Youtube, Google it. Learn how to fill out a personal financial statement. There’s a lot of small business owners out there that — give them a form, they have no idea what it looks like, and I always try to help them as best that l can, but l can’t really tell them what to put in there. They kinda have to do it themselves. There are different forms out there for a personal financial statement. So I would say, just Google. One look, fill it in and that way do it annually that way you’ll have it for your bank, if the bank asks you for it you can produce it right away, typically when we ask for financials when we like to see one, like see a financial statement that’s no older than maybe 60 days old, the other thing that you wanna prepare yourself for depending on your loan size, for my bank it’s 200 thousand dollars and over is you need to give annual financials to that bank, so be prepared april 15th or in this case july 15th or october 15th if you’re an extension filer, your bank just probably calling you depending on your loan size for your annual tax returns, so don’t anything of it it’s not that they call your loan, it’s just what happens during the recession in 2008, 2009 with all the new bank regulations the federal government is forcing us to do an annual review of certain loan sizes, different for every bank, my bank is 200 thousand or more line of credit that is over a hundred thousand dollars. So be prepared for that as well.

Matt: One of the concerns that a small business owner may have which you touched on the previous question was what kind of things where a bank calls my loan, or my loan would be foreclosed on, like what are the kinds of things that have to happen that would create such a situation.

Roger: The last thing that we’d wanna do is foreclose a piece of property or calling out, as long as your payment history is good, and you can provide your annual financials, and it doesn’t look like your business is going downhill, we’re not gonna necessarily call you a note, as far as a foreclosure goes on commercial real estate, as long you’re making your monthly payments we don’t have an issue with that, where we sometimes we’re on the something is you have an operating line of credit like I’ve said in the past we like you to zero that out at sometime during the year but f you don’t and you maxed it out and it just stays there, typically what we would do when it comes for renewal is that we’ll term it out so instead of giving you a line of credit, we’ll term it out for the next 4 or 5 year so eventually you’ll get paid off.

Loan Process Duration

Matt: One of the questions that people are often thinking about is how long this process is gonna take, and can you maybe shed some light on that, and also how that might be different for a line of credit versus purchasing a commercial property versus getting an SBA loan would those take different amounts of time and what is the timeframe for people to expect?

Roger: Good question, on a real estate loan, you’re probably looking at least 30 to 45 days right now and l can speak of at my bank we can have the approval for you, once we receive all the financial information we can have the approval for you probably in 5 to 7 business days what’s taking most of the time right now are appraisals, your appraisal can run out for 2 to three weeks before we get it back and get a chance to review it so if you’re looking at purchasing commercial or investment real estate playing on a good 30 to 45 days, now on an operating line of credit like l said our underating time is about 5 to 7 business days as as we have your updated financial information or current financial information we can typically get those approved and within 5 to 7 business days, now on the SBA 504 program it can take an extra 2 to 3 weeks and on the 7a, there’s different types of 7a’s alone,as a bank  if you’re an express lender with the 50 percent guarantee you can use your own documents, if you wanna go call a fully underwritten SBA 7a loan that can take up to about 30 to have them ready for you. So kinda like depends on what you’re looking for, what you’re looking to do

Matt: And all those timelines are really starting from the point where you have the full loan package is what you’re saying, the clock doesn’t really start ticking until you have all the materials together all the tax returns, all the financial statements, personal financial statements, all the other things that might be relevant to the loan itself that’s when the timeframe would start

Roger: The timeframe will start once we have all your financial information.

Multiple Loans

Matt:  So, as the business is getting started and you’re getting some traction, and they’re growing, and they need to have additional equipment and property, how come it is for them to have multiple kinds of loans with the bank and what are some things that they may need to think about in doing that?

Roger: You can have multiple loans with one bank especially when you’re buying equipment, if you’re using vehicles for the business purpose, you may have 4 or 5 different vehicle loans, you may have 4 or 5 different equipment pieces, just depends on what you do, and what you’re looking for, as far as real estate typically you have one loan on your property unless it’s something like an SBA 504 where then you have a 50 percent loan and a 40 percent loan, that 40 percent loan will take secondly in position, and there’s always this instance where a client may come to you and say hey l need a piece of equipment, but it’s not worth as much as I’m gonna be paying for well then we can use always use real estate as additional security or as the abundance of caution.

Relationship with your bank

Matt: So you way definitely believe in the importance of having a relationship with your bank, why is it that banks really seem to insist on having your business accounts when they do alone for you.

Roger:  Well number one we like to have that relationship with you. We like to see you come into the branch, make it positive once in a while, say hi, have a cup of coffee. The second reason is you’re using our balance sheet for that loan so you’re using our assets for that loans, we like to see you make a commitment to put more money back into our bank now believe it or not the positive account is actually a liability for a bank it’s not our money so we actually have to treat it as a liability but the nice thing, especially about community bank, is we use that money locally, so someone who opens up a cd or opens up a checking account here on Grove City or Pataskala or Canal Winchester typically we’re gonna lend that money out to people businesses in that surrounding area so that’s why we like to maintain that relationship number one is the positive account number one is for the relationship, but also keep the money coming in that we’re also lending out.

Determining Credit Score 

Matt: So can you help us understand the importance of the personal credit score for an individual, a business owner, how does a personal credit score weigh into them getting a business loan, and what is the sort of the range of scores that most banks would typically be looking for?

Roger: Your credit score can be anywhere from 340 all the way up to 850 as a bank we like to see a credit score of at least 680 or higher, what a credit score does is kinda like a risk reading on you, the higher your score the less risky you are to do transaction to do a loan with you landlord your insurance company everyone else that looks to that, as far as what we use the credit score for or a business loan is we structure a business loan as the loan will be in the business’s name but we’re gonna have you as a personal guarantee on that so your business on one not show up on your personal credit report, but we will ask you to guarantee it, so once again it’s like a risk reading of how you pay your bills your credit score is, and yes it’s very important we do look at it. Like I said, like a bank, we don’t like to see credit scores below 680.

Matt: So, when it comes to getting a business loan especially as a new business I’m gonna be making a personal guarantee that our business will be paying that loan, well help me understand what that actually means, like, what’s now my personal assets are at risk if I don’t pay that loan.

Roger: Again, the loan will be in the business name however if anytime the business cannot make that payment on time we will ask you to come in and make that payment so whether it just depends on your institution, if you’re an LLC you may have 4 or 5 members each 25 percent member LLC, we’re gonna have each of those as a personal guarantor on that loan so if the business can’t make it, our next phone call will be to the personal guarantor saying please come in and make that monthly payment.

Understanding Working Line of Credit 

Matt: Can you help us better understand what a working line of credit is, and how much of a working line of credit company typically would have the kinds of things that they would use that for.

Roger:  A business line of credit or a working capital loan is like a revolving line of credit, we would look at your balance sheet look at your assets, what do you have in assets, what do you have in accounts receivable, typically we’ll go may be up to 50 percent to 80 percent of accounts receivable that are less than 90 days, so when we’re looking at that we’re gonna ask you for it’s called an aging account receivable list and then we look at that we’ll gage on how big of a credit line we could give you, also when it comes to just business assets, typically when we do a line of credit like that as collateral we’ll do all current and future business assets along with accounts receivable and that includes inventory depending on what you do we also include inventory, so just depends on what the assets are of the business and typically you’re looking at 50 to maybe 75 percent of what that total is as far as the size of the line of credit.

Matt: So a business that has a large number of accounts receivable would be able to get a larger line of credit or additional business assets but it sounds like if I’m operating a cash-based business, maybe I have a restaurant or a food truck, or something that people are paying me for the services as l rendered l don’t really have much in the way inventory, then would the working line of credit really just be that large that based on the business assets that we have?

Roger: Yes based on your business assets that you have and a lot of people use your business line of credit or working capital for a lot of different things but most business will use it for their accounts payable or accounts receivable, so you may have stuff that’s out there that’s 35 60 days out, but you still need to pay that employee this week, so they may need to tap that line of credit to make payroll, but then in 30 days they can pay that off once they get paid. So as far as, it just kinda various from industry to the industry of your restaurant you’re gonna have equipment that’s hopefully free and clear maybe you have real estate if we have the first mortgage on real estate, we might be willing to also secure a second lane on that to give you that operating working line of credit, so it’s kinda like on a case by case basis.

Getting a Bank Loan

Matt: Do you have any last words for us in terms of what we should be thinking about as a small business owner that’s thinking about how to get a bank loan?

Roger: Start off small, don’t think that, and also make sure that it’s relative. If you’re a CPA, with a background of 20 years as a CPA, don’t think you’re gonna go out and be able to get a loan by starting a coffee house right away. It’s just not in your wheelhouse. However, again, if you’re a CPA with 20 years of background experience, you wanna open up a restaurant, tell us your story. You know we’re gonna look at that and say, “this guy has no experience opening up a restaurant”, but maybe you work for your mom and dad all throughout high school and college at your restaurant and you work there on and off postgraduate and say that, you know, that business restaurant by the back of your hand. So give us your bio and tell us why you wanna do what you’re gonna do, also keep good financial records. As I said, there’s nothing more important than looking at your current and past financial records, we wanna see that cash flow, we wanna see that debt service coverage issued.