With the economy improving, many pallet companies are considering expanding or looking at equipment upgrades that were put off during the economic recession. However being approved for outside financing is not as easy as it once was.
Since the financial crisis, lending requirements have become much stricter. Although the economy has improved in the last couple years, financial institutions are still being careful about risking credit. This presents a double-edged sword to pallet companies that are also dealing with rising lumber prices and customers wanting longer payment terms.
So if you are thinking about applying for financing for an expansion or upgrade, make sure that you do everything you can to improve your chances of being approved. This means you need to start preparing before even approaching a bank or other lending institution for any type of financing.
Check Your Credit History
The first thing that a small business owner should do when preparing to apply for a loan is evaluate his personal credit. Even though a loan would be made to the company, banks want to know if the personal responsible for the company is financially responsible and will check the personal credit of all the business owners during a loan approval process. This can be done by getting a free report from one of the three major credit bureaus (Equifax, Experian and TransUnion).
“They should check their personal credit to make sure that not only do they have a good credit score, but also that they have low revolving credit and that all their information is correct,” said Ian Liddell, general manager of Accord Leasing. “Most banks right now are looking for a credit score of 700 or above.”
If your personal credit does not look very good, take steps to improve it before applying for a business loan. You can do this by paying bills on time, paying off credit card balances every month, getting rid of outstanding debt and not applying for more credit too often. This will take time, so if you know you may need financing in the future start preparing now.
Companies should also check their Dun & Bradstreet (D&B) report. D&B compiles credit data on businesses from public records, vendor payment information and financial reports and uses it to produce reports that evaluate a company’s creditworthiness. It is essentially a company’s credit score.
“Lenders like Dun & Bradstreet,” said Liddell. “Because they can use the score card to make a credit decision.”
Many lenders check D&B scores during a loan approval process and a good D&B score can help a loan be approved faster as well as qualify a company for better terms, perhaps even removing the requirement for a personal guarantee. If there is not very much information available on a company through D&B, the lender has to dig further into a company’s credit history to find enough information to determine if a company is a good credit risk which takes a lot more time and effort.
Fill in All the Blanks
Incomplete or confusing information is one of the biggest reasons that financing applications are either denied or delayed. This can include not answering all the questions on the application, not being clear about how the ownership of the business is structured or not being clear on the type of business.
“I have one customer that is called lawn equipment, but they are a sawmill,” said Liddell. “They used to sell lawn mowers years ago, but don’t do much of that any more. But if a bank saw that, they would be wondering if it was a new business.”
Though some small business owners do not like revealing all their company’s private information, withholding some can lessen your chances of being approved for financing. After completing the application, review it thoroughly and clarify any information that could potentially by confusing to someone unfamiliar with your company. Do not leave questions blank that do not apply to your company. Instead, clearly mark them as not applicable.
Provide Additional Relevant Information
In addition to what is asked for in a loan application, provide any information that could help a lending institution understand why you are asking for credit and how it is reasonable for them to expect you to be able to pay them back. The more money you’re asking for, the more important this can be. Writing up a simple cost justification analysis can help someone who doesn’t understand how your company or industry works see the financial benefits of the expansion or machinery that you’re looking to finance.
“Show them that if you’re buying a nailing machine that it’s replacing two employees or that it’s costing you $30 per day but you’ll be making $100 of labor savings per day,” said Liddell. “That alone would put you in a nice position with a lender and show that you understand how you’re making money.”
Choose the Right Type of Financing and Lender
Depending on what you need financing for, a traditional bank loan may not be the best or most affordable financing option. Many pallet companies that need financing for new machinery see a leasing company as a viable alternative. Jeff Bridegroom, vice president and general manager of Calumet Pallet in Michigan City, Indiana, recently made some large equipment purchases for its new facility. He said that he has found that leasing companies often offer lower interest rates for machinery financing than banks do as well as tax benefits.
“We’re using leasing companies with lease-purchase agreements for some equipment because it has more cost advantages for us,” said Bridegroom. “They’ve been very competitive in regards to their interest rates compared to banks.”
If you do need to go through a bank, consider what type of bank you want to work with. A lot of small businesses prefer to work with local banks rather than larger national banks because of the personal relationships they are able to build.
“I would tell everyone to stay with more of a local bank where you’re a person, rather than going to a bigger bank where you’re just going to be a number,” said Bridegroom. “You definitely need to build a relationship with whatever bank you’re working with and it should be on a face-to-face basis so that your banker personally knows what you’re doing in your business and how you’re operating it.”
Part of choosing the right lender is comparing the requirements and terms from at least two lenders. Richard Berry, president of Berry Pallets in Waseca, Minnesota said that he got offers from two different banks before choosing which one he would use for financing a new building. He said a business consultant he hired helped create the “bidding” on the loan and get the best price.
“We had two competing banks giving us pricing,” said Berry. “The one that we were currently a customer with gave us the best deal.”
Get Expert Help
Very few business owners are experts in finance and accounting, so it makes little sense for them to try navigating the ins and out of obtaining a large amount of financing on their own. Working with an accountant or business consultant that is familiar with what it takes to successfully maneuver through a loan application process can be greatly beneficial.
Berry said that he relied heavily on the assistance of a business consultant when dealing with financing for his new building.
“He cost me quite a bit of money, but that was money well spent,” said Berry. “We’re not experts on this type of process because we don’t do it every day. But these guys do. And I would highly recommend a consultant to help guide someone.”
You can also find some free expert help through organizations such as SCORE (http://www.score.org). SCORE is a nonprofit association that helps small businesses through education and mentoring. It provides free business counseling and has volunteer mentors across many industries that share their expertise with small businesses.
