Everyone is familiar with bank financing because everyone in business has bought a car or a house, or taken a loan to put themselves or their children through college. Bank financing is the least expensive form of financing.
How It Works: Banks require collateral in the form of cash, property or business contracts. Many people are not aware that you can borrow money against a business contract. If you have a government contract or a contract with a major corporation that guarantees payment, banks will provide funding to fulfill those contracts. The amount a company can borrow against a contract or property is usually 80% of the value of the contract or property.
Preparation Expectations: Banks require forms to be filled out. These forms ask questions about the company's sales, future projections of sales, available corporate and personal assets to be used as collateral for a loan. If the company or management is putting up property as collateral, banks need to see a title or deed. They will then send out an independent appraiser to evaluate the property. Most commercial lenders who finance troubled companies want to see a business plan. The bank won't make a loan if they don't think the company is capable of running the business properly and therefore able to pay back the loan. In addition, they don't want to loan money to a company in a dying industry.
Large commercial banks also have work out departments. Work Out departments specializes in working with distressed companies. They have bankers and consultants trained to handle troubled companies. These professionals mostly focus on how to cut expense and reorganize existing loans.
Advantages: When interest rates are low, bank financing is very economical. Banks usually don't require equity in a company. Occasionally, banks will loan money and require warrants in the company. A warrant allows the bank to buy stock in the company at a specified or discounted price. If the company runs into additional trouble and can't make its payments, banks will sometimes restructure the loan or allow the company to pay only the interest.
Disadvantages: If the company isn't able to repay its loans, the guarantors of the loan can lose their homes and equity in the business.
How To Keep Them Happy: Besides keeping monthly payments current, send the company's loan officer monthly financial statements and written reports on how the company is doing. Let the bank know what accounts you are targeting, because they maybe able to make introductions or say something positive that will help open up new opportunities or close sales.
Internet Addresses: http://www.businessfinance.com/ is the address for the American Business Funding Directory, which provides the user with commercial bank contacts.