If you are thinking about applying for a business loan, here are some things to know to improve your odds of success. (I refer to “banks” throughout, but the same information generally applies to other types of lenders as well.)
UNDERSTAND THE 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 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 to keep the depositors”™ money safe, the banking regulators happy and the economic health of the community sound.
EACH BANK 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.
Selection of a bank is essentially limited to your choices from the local community. Typically, banks outside of your area of business are not as interested to make loans to your company 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.
BUILD RAPPORT
Building a favorable climate for a loan request should begin long before the funds are 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.
One way to 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.
PROVIDE THE INFORMATION YOUR BANKER NEEDS
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:
Ӣ What is the specific purpose of the loan?
Ӣ Exactly how much money is required?
Ӣ What is the exact source of repayment for the loan?
Ӣ What evidence is available to substantiate the assumptions that the expected source of repayment is reliable?
Ӣ What alternative source of repayment is available if managementӪs plans fail?
Ӣ What business or personal assets, or both, are available to collateralize the loan?
Ӣ 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 because an experienced loan officer will ask probing questions about each of them. 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.
WHAT TO DO BEFORE YOU APPLY FOR A LOAN
1. Write a business plan
Your 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.”
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. Also, 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.
Understanding the processes from the lenders”™ perspective and being prepared to provide the information they want will greatly improve the odds of getting the loan.
This has been a brief discussion of what can be a complex process and it is not intended as advice. Applying for a loan can require providing a considerable amount of financial information, so it may be wise to seek the assistance of a financial professional.
Norm Grill, CPA, (N.Grill@GRILL1.com) is managing partner of Grill & Partners, LLC (www.GRILL1.com), certified public accountants and consultants to closely held companies and high-net-worth individuals, with offices in Fairfield and Darien, 203-254-3880.
