2024-02-25

How to get a Loan From Your Bank (Commerical)

In this post i will go through each step to get a commerical loan from a bank

Pre-Deal

Initial Meeting:

  • Get different offers, tell them what you want to do, and provide them with the financials.
  • Sign a confidentiality agreement to protect your privacy for the data you share.
  • Provide a minimum of 3 years of historical financials that are not notices to reader and not audited, but in-between, which is review engagement.
  • Provide a net worth statement and credit report.
  • Offer background information on the company and clarify what you want the "ask" to be.
  • Present the organizational chart, ownership structure, and partnership details.
  • Confirm the banker's ability and experience.

    • Second Meeting:

  • Provide more details on the "ask."
  • Inquire about terms, range of pricing, amortization, upfront commitment fees, and covenants.
  • Ask the banker for their assessment of what is possible.
  • Expect to receive a term sheet, and engage in negotiation on commitment fees, rates, and timing of fees.
  • Once fees are paid and the term sheet is signed, the risk department will review it.

    • What is the banker looking for when preparing the term sheet?

    Outstanding Loans: How many other loans does the business have? How long have they been outstanding? What is the outstanding principle? What is the historical payment record? How much interest has been paid?

    Cash Flow: Provide further information to enable them to normalize the cash flow. For example, annual salaries or bonuses, CAPEX.

    Outlook: Offer them an outlook on what you want to do and present your story in detail.

    Level of Equity "Skin in the Game": Banks want to see a certain amount of equity to ensure that you have "Skin in the game." Equipment: 0-10%, Real Estate: 20%-30%, M&A/MBO: 20-40%.

    Factors that influene Borrow Capacity

  • Customer/supplier concentration without contracted terms
  • Extended customer or supplier terms (90+ days)
  • Environmental concerns
  • Businesses where cash is the primary form of payment (nail salons, car washes)
  • High-risk sectors (cannabis, high-risk regions)
  • Sustained declines in financial metrics (GM%, NWC, material prices)
  • Lumpy project-oriented revenues (contracts, tax service firms only at year-end)
  • High dependency on FX
  • Lack of skin in the game
  • High CapEx to maintain revenues

    • Initial Due Diligence

    They take the information and create an internal file to analyze if you can borrow this amount. Personal Net Worth? Other assets? Cash flow of the business? Only really basic, maybe 2-6 hours. They ask, "Can this get approved by the risk team?" Note: the bankers at this stage are salespeople; they are trying to sell the debt to you, often having to meet budgets they have to fulfill per year. They want you to borrow as much as they can.

    Preliminary deal reviews (possibility):

    If there are some challenges with your loan, there might be the possibility to submit a "first look" sheet with your commercial banker to the risk team. This can save you time and is around 2 pages long, summarizing the business, target customer base, competition, value add, management team, employees, historically financial performance, and documentation of the proposed debt transaction.

    Term Sheet

    If they are comfortable, they will give you a termsheet, which is nonbinding and communicates from the banker to the borrower what they will offer. The Borrower will receive this and negotiate with the bank and later signs it as well, stating that they will only work with this bank. I will make another post on how to negotiate a term sheet.

    Credit Underwrite

    In this stage, the bank will tour the facility, understand the sector competitors, and grasp the business. This will still be done by the banker, and they will submit the file to the internal risk management team.

  • Visit the business, operations, and talk to you (sell yourselves).
  • Provide a description of products/services and opportunities for growth.
  • Environmental review.
  • Information on the corporate entity and shareholders.
  • List of permits, contracts, and licenses.
  • Financials: Customers, sales based on product/location, customer order backlog, pricing, customer churn, customer credit terms, assets, CAPEX, AP & AR schedules, debt analysis.
  • Industry analysis.
  • Employee chart, key staff, nature of workforce.
  • Summary of operations and manufacturing process.
  • IT analysis, programs used in day-to-day operations.

    • This can take several weeks. Some tips:

  • Delegate the information requests to staff or advisors: financials to the accountant, operations to the salespeople, and people to the CEO.
  • Make it more detailed than you think.
  • Inform the bankers about the industry.
  • Do a walkthrough of the business.

    • Authorization & Revisions

    The risk management team will look at the file in a more detailed manner. They are not sales-oriented and are basically the defense. They may ask for more security or more information on pricing, competition, basically anything. They will then approve the Term Sheet. This can take up to 5 days, and they can ask further questions. If they decline the deal, you can ask the banker to refer to another lender that would do the deal or renegotiate the term sheet (reduce leverage, increase equity, increase interest rate). Most of the time, a decline is outlook-related and very specific; ask why? If they accept, the legal team will work on the Offer of Finance.

    Offer of Finance

    This is the document that the legal team will give you; it is binding, and you commit. Some banks even offer to close the offer of finance on the day of closing an M&A deal.

  • The Offer of Finance is sent back and forth between the bank and your lawyer.
  • You and your lawyer will work on the conditions of the funding.
  • The bank will conduct a PPSA search for liens against the business to find out which lender has claims over what.
  • Once everything is finished, the bank's risk team will review everything once more.
  • The money is then sent from the bank's counsel to your counsel and then to your balance sheet.

    • Legals costs

    <$2MM loan = $7,5k-$10k fee

    >$10MM+ loan = $15-25k

    Cost increases relative to the complexity and number of parties involved.

    Try to work with tier 2/3 legal firms; the brand name does not matter. And use lawyers from local offices.

    Post-Funding

    Quarterly Annual Reviews: Prepare a summary of how you performed with some financials, but also add what you did and what you will do in the future.

    Dealing with turnover: If your banker changes, take time to talk to the new banker on your file and encourage them to remain an internal advocate.

    Site visits: Some banks want to visit the business sites annually to ensure that everything is funded as it should be.

    Communicate your story: Bankers deal with a lot of people, and your "story" can be forgotten. Tell them about future lending opportunities and have patience; maybe even take them out to lunch. You never know when you might need their favor.

    Loan Brokers

    Get you connected, can provide many term sheets, have better connections, will walk you through the lending process.

    Cost: Small upfront retainer (10k) and then once the loan is funded as a percentage of the loan value, between 2-5% for <$10M and 1-2% for $10M+.

    Who should use loan brokers:

  • High-growth or distressed companies seeking non-traditional bank funding.
  • First-time borrowers or lean management teams.

    • Where?

    1

    Always ask the bank if you are in the right division for your lending amount. What is your target range?

    2

    Banks: They prefer A clients—those with substantial size and robust cash flows.

  • Competitive interest rates
  • Shorter amortization
  • Slower approval process
  • Low upfront fees (0.2%-0.5%)

    • Private Lenders: Assume more risk but offer higher interest rates.

  • Fixed interest rate (7%)
  • >Asset-focused; historical cash flow not required
  • Limited background checks
  • High upfront fees (2-3% of the deal)

    • Credit Unions: Positioned between Banks and Private Lenders, often serving community businesses or rural areas.

  • Rates higher than banks
  • Similar amortization terms
  • Regional focus
  • Low upfront fees (0.2%-0.75%)

    • Specialized Lenders: Cater to niche markets such as automobiles or planes, providing competitive products for specific industries.

  • Industry-specific focus
  • Competitive rates
  • Smaller loans
  • Low to medium upfront fees (0.5%-1%)
    • 3

    Process Visualized

    4

    Thanks,

    Finn