<< Continued from Part 1
Be Prepared
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 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.
