At some point, most small-business owners will visit a bank or other lending institution to borrow money. Understanding what your bank wants, and how to properly approach a loan officer, can mean the difference between getting the money for your shop expansion plans or having to scrape through finding cash from other sources.
Unfortunately, many business owners fall victim to several common, but potentially destructive, myths regarding financing, such as:
• Lenders are eager to provide money to small businesses.
• Banks are willing sources of financing for start-up businesses.
• When it comes to seeking money, the company speaks for itself.
• A bank is a bank is a bank, so all banks are the same.
• Banks, especially large ones, do not need (and really do not want) the business of a small firm.
Understand the Basic Principles of Banking
It’s vital to present yourself as a trustworthy businessperson, dependable enough to repay borrowed money and demonstrate that you understand the basic principles of banking. Your chances of receiving a loan will greatly improve if you can see your proposal through a banker’s eyes and appreciate the position from which they are coming.
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.
Each Banking Institution is Different
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.
Your choice of bank is essentially limited to those from your local community. Typically, banks outside of your area of business are not as 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 at that institution. 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.
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. 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.
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. One way to build rapport and establish trust is to take out small loans, repay them on schedule and meet all requirements of the loan agreement in both letter and spirit. By doing so, you gain the bankers trust and loyalty, and he or she will consider your business a valued customer, making it easier for you to obtain future financing.
Provide the Information Your Banker Needs to Lend You Money
Lending is the essence of the banking industry, 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, and 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 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?
Failure to anticipate these questions or providing unacceptable answers is damaging evidence that you may not completely understand the business and/or are incapable of planning for your firm’s needs.
Before You Apply For a Loan, Here’s What You Should Do:
1. Write a Business Plan
Your loan request should be based on, and accompanied by, a complete business plan. 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.”
2. 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.
3. 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.