| Show Me The Money! Strategies For Securing A Loan
|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 believeÖ
- Lenders are lined up and eager to provide money to
- Banks are willing sources of financing for start-up
- Loans are obtained by talking the lender out of funds.
- When it comes to seeking money, the company speaks for
- A bank, is a bank, is a bank, and all banks are cold,
- Banks, especially large ones, do not need and really do
not want the business of a small firm.
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 Bankerís Shoes
||There is a name for people who simply walk into a bank and
ask for moneyÖBank 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 bankerís 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 bankís 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. Thatís 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
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 source of repayment is reliable?
- What alternative source of repayment is available if
managementís 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 firmís needs.
Here are a few additional steps to take before applying
for your loanÖ
| 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 planís existence proves to your banker that you are
doing all the right activities. Once youíve put the plan together, write a
two-page executive summary. Youíll need it if you are asked to send "a quick
| Have an accountant prepare historical financial statements
||You canít 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; donít 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. Youíre 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
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, donít 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.
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