On The Issues: Financing

What is bank lending?

Eric Van Hoven, Retail Branch Manager, Gulf Coast Bank & Trust


About Bank Lending

Although every bank has its own set of guidelines and policies to help navigate lending decisions, financial institutions’ lending policies are heavily intertwined with regulatory policy administered by governmental agencies. That being said, bank financing is more traditional in nature than other financing sources. The process of acquiring financing from any institution can be aided by a knowledgeable lending officer that can serve as a resource and guide to applying for and securing capital. Most banks require some type of formal application process that can include requests for detailed personal financial statements that show the financial strength of the borrower (as well as proof of income in the form of personal and/or business tax returns) and other financial statements.


Who Bank Lending Benefits

Generally, each credit decision is considered on a case-by-case basis. In most situations, the loan amounts are based on a combination of what the customer requests, what the business needs, and what the business can afford to pay back. There is no real set minimum income requirement, but decisions are more based on the amount of debt currently being serviced, and how the new loan request will affect the company’s ability to repay. Each credit decision can take into account the personal credit history of borrower, business cash flow, as well as income that may be derived from sources outside of the business operation and assets that can be pledged.

Since each business is analyzed separately and every lending institution has different guidelines and tolerances, it is hard to make blanket statements about what is considered a strong business. Ideally, lending institutions would prefer to collateralize loans, where possible, to companies with solid cash flow and history of ability to repay. However, lending institutions can deviate from this based on factors such as creditworthiness, cash flow, history with the institution, ability to add guarantors, or the utilization of SBA programs.


Types of Bank Loans

Term Loan:

Business term loans are the most basic form of loans to take out. They are usually simple and straightforward and have no specially designated purpose. Term loans can be taken out for whatever a business needs. For example, term loans could be used to purchase real estate, permanent working capital, or equipment purchase. The terms on these loans can vary and can be done secured or unsecured.

Line of Credit:

A business line of credit is a device that allows you to borrow money as it is needed. You open the line of credit with a lender, and it typically has a maximum amount of money that you can borrow. A line of credit can be used to fill the gaps in cash flow, generally for more established businesses with a history of ability to repay debt.

Commercial Real Estate Loans:

As the name implies, a commercial real estate loan is secured by a rental property, such as an apartment building, office building, shopping center, or by some sort of business-related property, like a hotel, bowling alley or self-storage facility. These types of loans are generally set up for well established businesses that have a good track record of borrowing and solid credit history; however some institutions will consider startups and newer businesses based off of satisfactory collateral and certain credit criteria. Whether you are building, renovating, or purchasing, a Commercial Real Estate loan can be customized to meet your needs.


SBA Loans

For businesses who do not qualify for a traditional bank loan, the Small Business Administration (SBA) provides a number of financial assistance programs for small businesses that have been specifically designed to meet key financing needs, including debt financing, surety bonds, and equity financing.

Because the SBA does not make direct loans to small businesses, it is common for banks to partner with the SBA to provide the opportunity for debt financing. The SBA sets the guidelines for loans, which are then made by its partners (lenders, community development organizations, and micro lending institutions). The SBA guarantees that these loans will be repaid, thus eliminating some of the risk to the lending partners. When a business applies for an SBA loan, it is actually applying for a commercial loan, structured according to SBA requirements with an SBA guaranty. SBA-guaranteed loans may not be made to a small business if the borrower has access to other financing on reasonable terms.

An SBA loan is perfect for a wide variety of purposes including franchises, business acquisitions, lines of credit, and even commercial real estate initiatives. An SBA loan option may be ideal for both a startup company and an established organization because it offers:

  • Lower Monthly Payments
  • Flexible Terms
  • Low Down Payment
  • Financing Closing Costs

To qualify for an SBA loan, the small business must meet the bank’s lending criteria, as well as the SBA’s requirements. In addition, the lender providing the SBA guaranteed loan must certify that it would not provide the loan under the proposed terms and conditions without an SBA guaranty. The applicant must be eligible and creditworthy, and the loan must be structured under conditions acceptable to SBA for a guaranty to be issued.

In closing, each lender has its own guidelines, credit criteria, and process. It is important to keep this in mind when evaluating your method for borrowing money for you or your business. A good way to get started is to ask around – ask other business owners who they have a relationship with and would they be willing to recommend the work of an area financial institution.

← News and Insights