Communicating with bankers
Bankers are pretty savvy people so you must have done your homework and know something about what you need to bring to the table if you're asking a bank to lend you money to either start up or expand an exiating business. Even when you can show a strong credit rating and possess collateral, they still demand that you explain in sufficient detail how you will use their money, what profit you expect to make with it and how you win pay it back. Bankers do not want to advance money to you just to improve your lifestyle.
Bankers when considering your request for a loan-they would like to see you produce $3 of profit for every $1 of their money borrowed often use an unspoken formula. In order to produce this financial result you must invest a substantial portion of your loan in well focused marketing activities, such as magazine ads, direct mail promotions and adding inside and outside sales assistance.
Keep one fact in mind when considering a bank loan: more than anything else, bankers must assure that they get paid back, on time. Be prepared to offer several ways that they can use to get their money back if the worst happens to your business. Don't take this attitude as a personal insult. It is simply how the world of commercial banking works.
The Eight Step Approach to Asking For A Bank Loan
Be realistic however, when you are considering the request for bank financing--it can take several months to finish your business plan summary and pull together the necessary documentation to satisfy the bank's demands. Allow enough time before you apply. Avoid waiting until you are desperate for cash!
Step 1 : Why Do You Want Money?
- Pay off debts
- Substitute new debt for equity
- To buy equipment, vehicles, and buildings
- To expand business through more marketing, inventory, people,etc.
- Be honest. Have you really checked out sources of money other than banks? (for example: Credit terms from suppliers, payment advances from customers, loans from family, friends, private investors)
Step #2: How to Check Out Banks
- Check out how financially sound the banks are you are considering.
- Ask for the bank's latest annual report. Read the description of how their business was last year and look at their financial statements
- Ask the banker to compare their capital reserves to the requirements of the federal regulators.
- Ask to be shown a sample loan application package before you decide which bank to choose
- Read the package over, making notes on anything you question or don't understand
- Contact the bank lending officer with your questions. If you are not comfortable with how they are answered, look elsewhere.
Step #3: Communicating With The Bank
- The history of your company
- Summary of market conditions, including competition, and your marketing strategy the 5 P's-- People, Product, Price, Place & Promotion. Historical financial results & future projections -- Profit & Loss and Cash Flow
- Err on the side of conservatism
- Best to have past financials on accountants letterhead
- Your resume--Why are you qualified to run the company?
- Examples of products or services (photos, brochures, videos, etc.)
- Personal financial statement
- If applicable: inventory requirements; accounts receivable aging
- possibly a business plan
Step #4: What To Expect When You First Visit the Bank
- Try to meet the loan office first outside of the bank, say for lunch--this is "neutral turf."
- Come prepared with a combination one-page business plan summary and loan request
- Indicate on the loan request how much money you are looking for; what you win use it for (be specific); how long you want to borrow it; how you will pay the loan back; and what you plan to do if your revenue isn't enough to cover the loan payments.
- Expect them to examine your personal credit history, so do it before they do by contacting one of the three big credit agencies: TRW, Equifax, & Trans Union.
- Think in advance what you will use as security for the loan--that is collateral.
- Expect the loan officer to ask some pointed questions about your certainty of attaining the future sales and profits you are projecting.
- Know your personal and company finances forwards and backwards!
Step #5: Realize The Importance of Cash Flow & Credit
- Realize the essential reality of borrowing from a bank: They want their money back! And they want it on a regular schedule. They don't really want to have to take over your company or sell your collateral.
- This reality results in the banker doggedly pursuing your projection of cash flow for the year or two after you will receive the loan.
- The "C" of cash flow is one of five "Cs" that bankers look for from good loan applicants.
- capacity - Ability to repay.
- Character - Your willingness to show discipline and keep your promises to repay
- Capital - How much have you and other investors put into the business?
- Conditions - How is your industry doing?
- Collateral - Your security.
- Short-term loans. For one year or less. Normally used for short-term uses, such as inventory. Need for loan and repayment occur in the same 12 month period.
- Working capital loans. Also short-ten-n, usually to cover your cash needs after you make and sell your product, but before you get paid.
- Seasonal loans. Loan is paid off at the end of season.
- Term loans. Maturities of one to five years. Used primarily to purchase capital equipment and to give semi-permanent increase in working capital. Paid back in monthly payments.
- Long-term loans. Over five years in length. Used to build, buy real estate, acquire an existing business or buy a franchise.
- SBA loans. Loans where the principal repayment is partially guaranteed by the U.S. government. Line of credit. Similar to a credit card loan.
- They assess the 5 C's
- They look for a persuasive marketing strategy
- They look for determination on your part
- They look for financial projections that support your marketing strategy
- They look at how much they can make on your proposed loan
- They look for significant experience in managing your type of business
- They look at how much of your own (or family's) money you have put into the company
- They look at what you will do with the money.
- They examine the most recent financial results for your business.
- They examine what security (collateral) you can put up.
- Interest rate--Get two banks to bid and compare their rates.
- Length of loan--Set a maximum monthly payment you wish to make and drive for a repayment length that will allow this.
- Personal guarantee--Hard to avoid, particularly if you are a corporation. But you'll never know if you don't ask.
- Collateral--Try to get by with only business collateral. If they insist on personal collateral, DO NOT up your house. Try putting up a CD instead.
Step #8: Understand What Happens After the Loan Request is AcceptedYou should review the paperwork with your accountant to make sure it is in your best interest. You may wish to use your accountant as your negotiator with the banks offering you financing. At the loan closing, you must:
- Produce title to your collateral.
- Usually sign personal and commercial guarantees.
- If a corporation, sign a corporate resolution to borrow" which says you are the authorized corporate officer allowed to sign agreements.
- Sign signature cards if you open business bank accounts.
- Sign a promissory note(this is where you sign your life away).
- Sign a disbursement request to release the funds to you. On term loans, you receive the whole loan at once. On credit lines, you only receive what you need initially. The remainder is approved but not drawn, which saves you interest cost.
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