How to Avoid Looking Stupid When Talking to Banks

Luckily, there are few hacks you can use to avoid looking stupid when talking to banks. All professionals speak in code.  It's not intentional.  It's just how they were taught. 

After using it so much, they forget that it's not the way most people speak.  Even when confronted and confused by other professional jargon, they fail to recognize it.  A doctor is likely as confused by banker speak as a banker is by doctor speak. 

Bank-speak can be extremely confusing for borrowers, even small-business owners who run complex operations.  Some banks may hide behind claims of legal liability, or perhaps they've forgotten how unfamiliar these terms are to someone outside the industry.  Either way, banks' over-reliance on credit jargon is a false precision that can cost them valuable business.

 Forbes Magazine

First hack on how to avoid looking stupid when talking to banks

Know how much you need. Be clear about when you need it. Finally, know how you will use it.

You can avoid a dizzying array of bank products by simply knowing the answers to these three questions.  Why?  Because, certain classes of loans have minimum thresholds, while others require lengthy application processes.  All come with stipulations on how the funds can be used.

Let's use a small business administration backed loan, more commonly known as an SBA loan, as an example.  For instance, an SBA loan is the holy grail of small business loans because it provides the most favorable terms to small business.  For example, you will likely have the lowest monthly payments with an SBA loan because it offers the lowest interest rates and longest payback periods, usually 7-10 years.  Most commercial loans max out at 4 years.

Let's use our 3 questions hack to avoid looking stupid when talking to a bank about an SBA loan.

First, how much do you need?

SBA loans come in 4 flavors.  Each has a different borrowing level threshold. 

1. Microloans: $10K up to $50K.  The average is around $15K
2. Community advantage: $50K up to $250K
3. 7(a): $50K up to $5M
4. 504: up to $5.5M

Second, how will you use it?

Each of these loans has stipulations for how the funds can be used.   Microloans and 7(a) loans are the most flexible.  They can be used for paying bills (working capital) or purchases (non-working capital). 

Community advantage loans are like 7(a) loans, but can only be used by small businesses in underserved markets. 

504 loans are for real estate and equipment purchases.

Lastly, when do you need it?

The SBA application is slow and cumbersome.  If you need the money quickly, this is NOT the route to go.

A real-life example of how to avoid looking stupid when talking to banks 

I'm a small business owner who doesn't want to look stupid when I talk to my bank.  I'm profitable and have been in business for 3 years.  I'm looking to open a new location, and I need money to do it.  It will take me six months to be ready to open my new location.  So, what should I do?

First, how much do I need? 

I make out a budget of all the things that I need: furniture, equipment, computers, people, etc.  When I add it all up, it comes to $65,000.  Perfect.

Next, how will I use it? 

Well, I just made a list of everything to estimate the amount, so that step is already done.  Check.  I just need to ask if I'm in an underserved market.  In this case, I'm not.

Finally, when do I need it? 

Six months from now so I have time.

Great, now what would I ask so I can avoid looking stupid when talking to my bank?  With this information, I can go and ask for a 7(a) and explain why I'm a good fit.

Second hack on how to avoid looking stupid when talking to banks

Is my business ready for a loan?  In our post 'Small Business Lending is Booming: Are You Ready', we go into this topic in detail.  But, for this post, we'll keep it simple.  I apologize in advance, but this is not the easy part.

1. How long have you been in business?
2. What's your personal credit score?
3. Are you a US citizen, and over 21?
4. How much debt do you already have?
5. Do you pass the basic loan fitness tests?

You may be saying, 'you call that simple?  Trust me., we can get more technical, but these 5 questions are enough to avoid looking stupid when talking to banks.

First, how long have you been in business? 

If you've been in business for less than 2 years, you will not qualify for an SBA loan and will have to use one of the bank's products.  They are likely to have higher rates and shorter payback periods, e.g. higher monthly payments.

Second, what's your personal credit score?

If you are below 650, you will not qualify for an SBA loan.  In fact, if you are below 700, you will face an uphill battle.  You probably shouldn't even bother visiting a bank.  You will likely have to look to non-traditional lenders, which equals higher interest and monthly payments.  Be very wary if you find yourself in this position.

Next, are the citizenship and age questions. 

If you are not 21 and a US citizen, you will not qualify for an SBA loan.  Few lenders will loan to people under 21 for the simple reason that there hasn't been enough time for a solid credit score, and the business hasn't been established.  Unfortunately, you cannot apply for an SBA loan if you are not a US citizen.  So, it's good to be prepared to have all your documentation before speaking with a bank.

Finally, questions 4 and 5 are related.

When applying for a loan, they will almost certainly ask for a debt schedule.  So you don't look stupid when talking to a bank, a debt schedule is a fancy term for a list of all your debt. For instance, the loans, credit card balances, etc. that are outstanding.  Next, how much do you owe on each, and when will they be paid off.  

They will also ask for a P&L or income statement.  This is a standard financial document your accountant can provide.  Don't worry about looking stupid when talking to a bank, it's just a table of how much you made, less how much you spent.  We offer some free tools that can help.

Finally, you will need to pass some fitness tests.  We won't cover the tests here, but you can find them in our post 'Small Business Lending is Booming: Are You Ready'.

Ok, that's a lot.

Let's use the example from the first hack

First, I've been in business for 3 years.

Check.  Great, but we didn't know our score.  So, we would have to use a free credit report checking service, Credit Karma, Experian, etc. to know what it is.  Make sure you look for your FICO score.  They are free and will not hurt your score to check. 

Second, Credit Score

In this example, I will use Experian and find my score is 700.  Ok, not bad, but now I know that I'm going to face some challenges.  So, I'm going to need to pass my fitness tests will flying colors.

Third, Age & Citizenship

I'm an adult, US citizen, and over 21. So, check. Check. 

Finally, Debt & Financial Fitness

My credit score check will tell me how much personal debt I'm carrying.   Next, I'd ask my accountant to provide my balance sheet.  He or she will know what that is. 

Again, don't worry about looking stupid when talking to the bank, a balance sheet is just a table listing all your assets (what you have) and balancing them vs. your liabilities (what you owe) and your equity (how much is left: assets - liabilities).  You would use this data to run your fitness test.  For this example, let's say I just make it.

It is a lot. But, importantly, we've learned enough to avoid looking stupid when talking to our bank.

We now know that we have a selling job to do.  Our credit and fitness tests pass, but just barely.  If we are going to get this loan, we will have to convince the banker on the power of our business plan.

Final hack on how to avoid looking stupid when talking to banks

Have your business plan and business model ready before you go to the bank.  We've covered both topics in detail in our posts: '4 Simple Steps to Write a Successful Business Plan' and '5 Steps to Take When Analyzing Your Business'.  We won't rehash that here.

It requires a lot of homework if you want to avoid looking stupid when talking to banks

However, if you do the homework, you will save yourself a lot of time and stress.  The good news is that you don't have to do this alone.  There are both free and paid services that you can use to help.  SCORE can be a very useful free service if you want someone to check your work or coach you.  ProStrategix, a paid service, offers a more hands-on, concierge service, which can do most of the homework for you.

In summary, it's important to do your homework so you avoid looking stupid when talking to banks. Whether you choose to go it alone, get some coaching, or have someone do it for you is a personal choice depending on how much time and money that you have available.