Business Loan Economics
To some, this observation may seem obvious, but to a VAST majority of us, this truth escapes us.
Banking is a business and more so business loans are BIG BUSINESS.
To add another tool in the business owner's tool belt in their quest to obtain a loan, let's discuss the basics of business banking economics.
Similar to learning the basics of economics, one must first learn that the economics of any and all markets (buyers, sellers, producers, and consumers) hinges on the foundation of supply and demand.
Also, one must be aware that the 'market forces' that regulate supply and demand are price and quantity availability.
With these market characteristics known and understood, anyone let alone business owners can gauge the attractiveness of obtaining a business loan.
More specifically, banks like any other business concern, are in the market to MAKE MONEY.
I don't understand why banks catch UGLY for this; maybe it's because they don't shy away from their main objective which is to make healthy profits based on optimizing the forces that are in their control from an economic standpoint (product availability or lending money AND the prices they charge for this product or interest).
Banks make money from making loans.
Nothing fancy or complex here.
The trick is that banks which receive money from deposits and loans from other banks, MUST make a profit by lending money at higher rates than which they borrow funds.
In the banking world, the difference in what the bank charges borrowers to the rate at which banks repay on borrowed funds is the 'spread', and this is how banks make money.
Also, banks can usually increase the funds available for lending by 1) increasing deposits; 2) borrowing more money for other banks or the FED; 3) raise more equity capital from investors.
As an aside, investors LOVE to make bank investments because they are relatively SAFE investments in terms of protecting capital.
O.
k.
, I'm not making light of the fact that banks are at the mercies of both federal and state regulatory agencies, but for the most part, they play a vital role in ensuring the market efficiency of their service areas from both a consumer and commercial standpoint.
How does the bank's profit motives impact and affect business owners that are in the market for obtaining debt capital? Let's talk a little about the qualitative aspects of the business of banking.
I encourage business owners and/or principals to create, sustain, and grow their relationship with bankers.
Bankers can and should play important roles for businesses as advisers and someone to receive objective advice from an operational and financial perspective.
Also, understand that bankers are in the business of SALES and they specialize in the distribution of money for optimal benefit.
More so than anything, though, they are and have been trained to enter deals that earn their respective banks the safest and most profitable return (most of the time).
Armed with this knowledge, business owners and/or principals can learn and position their loan requests in the format and presentation that speaks the banker's language.
In the presentation of this request, it's important to disclose upfront the benefits (the banker's return on and of investment and the level of risk proposed) in order to attract him / her to become an advocate for your request once it goes to underwriting.
Banking is a business and more so business loans are BIG BUSINESS.
To add another tool in the business owner's tool belt in their quest to obtain a loan, let's discuss the basics of business banking economics.
Similar to learning the basics of economics, one must first learn that the economics of any and all markets (buyers, sellers, producers, and consumers) hinges on the foundation of supply and demand.
Also, one must be aware that the 'market forces' that regulate supply and demand are price and quantity availability.
With these market characteristics known and understood, anyone let alone business owners can gauge the attractiveness of obtaining a business loan.
More specifically, banks like any other business concern, are in the market to MAKE MONEY.
I don't understand why banks catch UGLY for this; maybe it's because they don't shy away from their main objective which is to make healthy profits based on optimizing the forces that are in their control from an economic standpoint (product availability or lending money AND the prices they charge for this product or interest).
Banks make money from making loans.
Nothing fancy or complex here.
The trick is that banks which receive money from deposits and loans from other banks, MUST make a profit by lending money at higher rates than which they borrow funds.
In the banking world, the difference in what the bank charges borrowers to the rate at which banks repay on borrowed funds is the 'spread', and this is how banks make money.
Also, banks can usually increase the funds available for lending by 1) increasing deposits; 2) borrowing more money for other banks or the FED; 3) raise more equity capital from investors.
As an aside, investors LOVE to make bank investments because they are relatively SAFE investments in terms of protecting capital.
O.
k.
, I'm not making light of the fact that banks are at the mercies of both federal and state regulatory agencies, but for the most part, they play a vital role in ensuring the market efficiency of their service areas from both a consumer and commercial standpoint.
How does the bank's profit motives impact and affect business owners that are in the market for obtaining debt capital? Let's talk a little about the qualitative aspects of the business of banking.
I encourage business owners and/or principals to create, sustain, and grow their relationship with bankers.
Bankers can and should play important roles for businesses as advisers and someone to receive objective advice from an operational and financial perspective.
Also, understand that bankers are in the business of SALES and they specialize in the distribution of money for optimal benefit.
More so than anything, though, they are and have been trained to enter deals that earn their respective banks the safest and most profitable return (most of the time).
Armed with this knowledge, business owners and/or principals can learn and position their loan requests in the format and presentation that speaks the banker's language.
In the presentation of this request, it's important to disclose upfront the benefits (the banker's return on and of investment and the level of risk proposed) in order to attract him / her to become an advocate for your request once it goes to underwriting.
