Show
Me The Money!
Strategies
For Securing A Loan
“Money
is always there, but the pockets change.”
– Gertrude Stein
Most small businesses will, at some point in their
life, go to a bank or other lending institution to borrow money for expansion of
their operation. Many small business owners, however, initially fall victim to
several of the common and potentially destructive myths that concern applying
for loans. For example, first-time borrowers commonly believe…
Lenders are lined up and eager to provide money to small businesses.
Banks are willing sources of financing for start-up businesses.
Loans are obtained by talking the lender out of funds.
When it comes to seeking money, the company speaks for itself.
A bank, is a
bank, is a bank, and all banks are cold, impersonal institutions.
Banks,
especially large ones, do not need and really do not want the business of
Research shows that 67 percent of all small
businesses that borrow money get that money from commercial banks. This places
banks among the largest sources of credit; and makes them one of the most vital
components to small business survival. Understanding what your bank wants, and
how to properly approach them, can mean the difference between getting your
money for expansion and having to scrape through finding cash from other
sources.
A
Mile In The Banker’s Shoes
There is a name for
people who simply walk into a bank and ask for money…Bank Robbers. To present
yourself as a trustworthy businessperson, dependable enough to repay borrowed
money, you need to first understand the basic principles of banking. Your
chances for receiving a loan will greatly improve if you can see your proposal
through a banker’s eyes and appreciate the position that they are coming from.
Banks have a
responsibility to government regulators, depositors, and the community in which
they reside. While a bank’s cautious perspective may be irritating to a small
business owner, it is necessary in order to keep the depositors money safe, the
banking regulators happy, and the economic health of the community growing.
Picking A Local Favorite
Banks differ in the
types of financing they make available, interest rates charged, willingness to
accept risk, staff expertise, services offered, and in their attitude toward
small business loans.
Selection of a bank
is essentially limited to your choices from the local community. Banks outside
of your area are not anxious to make loans to your firm because of the higher
costs of checking credit and of collecting the loan in the event of default.
Furthermore, a bank
will typically not make business loans to any size business unless a checking
account or money market account is maintained. Out-of-town banks know that
non-local firms are not likely to keep meaningful deposits at their institution
because it is to costly in both time and expense to do so.
Ultimately your task
is to find a business-oriented bank that will provide the financial assistance,
expertise, and services your business requires now and is likely to require in
the future. Your accountant will be able to assist you in deciding which bank
will best suit your needs and provide the greatest value.
Realize The Value Of Schmooze
Devote time and
effort to building a background of information and goodwill with the bank you
choose, and get to know the loan officer you will be dealing with early on.
Building a favorable
climate for a loan request should begin long before the funds are actually
needed. The worst possible time to approach a new bank is when your business is
in the throes of a financial crisis. That’s like walking into a funeral parlor
carrying a body!
Remember that bankers
are essentially conservative lenders with an overriding concern for minimizing
risk. Logic dictates that this is best accomplished by limiting loans to
businesses they know and trust.
Experienced bankers
know full well that every firm encounters occasional difficulties; a banker you
have taken the time and effort to build a rapport with will have faith that you
can handle these difficulties.
A responsible
reputation for debt repayment may also be established with your bank by taking
small loans, repaying them on schedule, and meeting all facets of the agreement
in both letter and spirit. By doing so, you gain the bankers trust and loyalty.
He or she will consider your business a valued customer, favor it with
privileges, and make it easier for you to obtain future financing.
Enter With A Silver Platter
Lending is the
essence of the banking business and making mutually beneficial loans is as
important to the success of the bank as it is to the small business. This means
that understanding what information a loan officer seeks, and providing the
evidence required to ease normal banking concerns, is the most effective
approach to getting what is needed. A sound loan proposal should contain
information that expands on the following points:
What is the specific purpose of the loan?
Exactly how much money is required?
What is the exact source of repayment for the loan?
What evidence is available to substantiate the assumptions that the expected
What alternative source of repayment is available if management’s plans
fail?
What business or personal assets, or both, are available to collateralize
the loan?
What evidence is available to substantiate the competence and ability of the
management team?
Even a brief examination of these points
suggests the need for you to do your homework before making a loan request. It
is a virtual certainty that an experienced loan officer will ask probing
questions about each of them. Failure to anticipate these questions, or to
provide unacceptable answers, is damaging evidence that you may not completely
understand the business and/or are incapable of planning for your firm’s
needs.
Here are a few
additional steps to take before applying for your loan…
Write
A Business Plan
To present
you and your business in the best possible light, the loan request should be
based on and accompanied by a complete business plan. This document is the
single most important planning activity that you can perform. A business plan is
more than a device for getting financing; it is the vehicle that makes you
examine, evaluate, and plan for all aspects of your business. A business
plan’s existence proves to your banker that you are doing all the right
activities. Once you’ve put the plan together, write a two-page executive
summary. You’ll need it if you
are asked to send “a quick write-up.”
Have an accountant prepare historical financial statements.
You
can’t talk about the future without accounting for your past. Internally
generated statements are OK, but your bank wants the comfort of knowing an
independent expert has verified the information. In addition, you must
understand your statement and be able to explain how your operation works and
how your finances stand up to industry norms and standards.
Line up references.
Your banker
may want to talk to your suppliers, customers, potential partners or your team
of professionals, among others. When a loan officer asks for permission to
contact references, promptly answer with names and numbers; don’t leave him or
her waiting for a week.
Walking into a bank and talking to a loan officer will always be something of a
stressful situation. You’re exposing yourself to the possibility of rejection,
scrutiny, and perhaps even criticism of your business. Preparation for, and
thorough understanding of this evaluation process, is essential to minimize the
stressful variables and optimize your potential to qualify for the funding you
seek.
Keep in mind that
many times a company fails to qualify for a loan not because of a real flaw, but
because of a perceived flaw that was improperly addressed or misrepresented.
Finally, don’t be shy about calling your accountant with questions; their
experience and invaluable advice will be able to best prepare you for working
with your bank.