To build a longstanding relationship with your banker, it is important for retailers to understand what the expectations will be, the red flags that can literally kill the deal, how the loan process actually works, and how bankers think.

To begin with, let’s examine the ways bankers and independent retailers differ.  Typically retailers are entrepreneurs and as such are willing to assume risks in order to succeed.  They are for the most part optimistic people focusing on the upside of any given opportunity. Additionally, their businesses are not heavily regulated. When it comes to business growth, the more the better might sum up a retailers approach. Compare these traits to those of a typical banker.  Bankers are by nature risk avoidant and generally speaking, pessimistic, choosing to focus on the downside. Banks are highly regulated. They are fine with growth, but take a much more conservative approach, wanting to make sure that there is a solid plan in place before committing.

When interviewing a perspective banker for a loan, there are a few questions that you should ask:

  • What is your experience with my industry?
  • How does the size of my loan compare with other loans at this bank?
  • What happens if I hit a bump in the road?
  • Is your bank actively growing its loan portfolio?
  • How are loan decision made at your bank?
  • Is the loan officer the decision maker?
  • Who will handle my account after closing?

There are a few of the questions that the bank WILL ask you so be prepared. They will want to know how you report financial results. Were they internally prepared? Did a CPA review them? Have they been audited? The bank will also inquire as to your ownership structure. Are you a C-Corp, S-Corp, LLC, or Partnership? What does the decision making process in your organization look like? Do you individually make all the decisions or are they made by committee a board or shareholders? They will also inquire about your professional providers including a board of directors, CPA, attorney, or any consultants you might retain for guidance and counsel.

Here are the questions your bank SHOULD ask you:

  • Describe your market.
  • Who do you sell to?
  • What is your niche?
  • What makes your store special or different?
  • Who is your competition?
  • What are your competitive advantages?
  • Describe your financial results and your forecast?
  • Where do you see your company in five years?

Bankers like data and information that will back up your request. Here is a partial list of items to provide bankers preferably before being asked.

  • Timely submission of financial statements.
  • Consistent communication.
  • Early notification of problems.
  • Explanation of large movements in sales, inventory, expenses, etc.
  • Budgeting. This could include the income statement and balance sheet which demonstrates how the business has been performing. Be sure to also include your merchandise plan. A solid sales and inventory forecast shows the banker where you are headed and how you plan to get there.
  • Income statements with comparisons to prior periods including such items as gross margin, owner salaries, depreciation, other non-cash expenses, and one-time non-recurring expenses.
  • Pertinent articles from trade magazines are also helpful.

When bankers review your numbers they are focusing on three main areas.  The first is collateral, in other words, how much you are willing to put in.  You must have “skin in the game”.  The other two areas are cash flow and financial strength (liquidity and capital).

Red Flags for a Bank

Be forewarned of the areas that send up the red flag for the bank. If not overcome, these are potential deal killers.

  • No budget. This should be obvious. Don’t even waste your time or the banker’s time without one. All you will end up with is a free cup of coffee and a complimentary pen with the banks logo on it.
  • Poor credit score or no credit references.
  • Lack of understanding or inability to explain your own numbers.
  • Complicated ownership structure.
  • Tax income is very different than book income.
  • Your primary concern is what the interest rate will be and/or if you will have to sign a personal guarantee.
  • A belief that the loan can be paid back through profits alone.
  • No management team.
  • Expansion and growth without proper planning.
  • Inability to provide periodic and timely financial information.
  • Slowing turnover. This is a big sign that inventory is growing faster than sales and is an indication of potential cash flow and margin concerns.
  • No “skin in the game”
  • Poor communication or lack of honesty.
  • Fighting with management, between partners, or among family members.

For starters your banker will request two years of income tax returns for the company and each owner and two years of financials along with interim financials for the current year. You might also be asked for a personal financial statement and an accounts receivable and account payable aging report.  Don’t be surprised by a request for a personal guarantee.  An unwillingness to put personal funds into a business, should they be necessary, sends a strong message to the loan review committee. Finally, the importance of positive cash flow cannot be overstated.  The lack of cash flow kills more deals right from the beginning than almost anything else.

Assuming that you have made it this far, here is what the loan evaluation process entails. The bank will pull your credit report.  Some banks key in on particular data points from the information collected to come up with what might be called a “liquid credit score”. If the LCS comes in above their base requirements, they will most likely move forward with the loan review process.  From there, the bank reviews the data for business and personal cash flow to be certain you won’t experience any difficulty making the loan payments. Once all of the other factors previously mentioned have been reviewed and all are deemed to be satisfactory, the collateral requirements will be established.

Understanding how banks think and operate, along with being prepared, will go a long way toward successful loan approval and a longstanding banking relationship.

Ritchie Sayner


(I wish to thank Paul Van Erem of Enterprise Bank & Trust in Kansas City, MO for his generous contribution to this article.)


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