Some of the reasons that make it seem so difficult are that many lending officers feel that they’re lending you their money instead of the bank’s. They take almost personal responsibility for maximizing repayment.
Another is that they are particularly suspect of new ventures. Since 4 out of 5 or 80% fail within the first three years, many lenders require a three-year history of doing business.
Lastly, with all the bank merging and acquisitions that have taken place the decision-making process has been moved far off-site from the local branch. Add all of these reasons up, and you had better be prepared to razzle-dazzle the banker.
Here are some tips to make lending you more attractive to the bank. First, start with a two-part presentation. Initially submit a brief overview of your loan request. In this overview include:
- Excerpts from your business plan about your business concept, management team, and financial projections.
- Credit history overviews of the principals of your business.
- Brief answers to key lender questions of how much you’ll need, how you’ll use it, and how will you pay it back?
This should be a two to three page document and can be considered a mutual qualifier. It determines if the bank has any interest in lending you funds before you spin your wheels for hours in front of the loan officer. You may want to end the document with your phone number so that the banker can call you back for an appointment or discussion.
If you’ve dazzled the loan officer sufficiently and have obtained an appointment to meet with him, then it’s time to prepare the “big guns”. The ammo you’ll come prepared with will be three years of personal tax returns for all the principals of your company and the existing business. Include credit reports on all principals, a complete and impressive business plan, and collateral and capitalization information.
This sounds like a lot of information and will require immense effort, but that’s why business ownership isn’t for everyone.
In addition to being prepared with all that paperwork be prepared for any off-the-wall questions the lender might throw at you. Take time to think about and originate a 30-second commercial about what you plan on doing and how it will benefit them and the business.
Be prepared to explain away any credit blemishes that show up on the credit reports before the banker has an opportunity to worry about them. Be sure you’re able to show “cash-flow” understanding and awareness, without which any business is doomed. Plot your most realistic estimated cash flow and bank account balance. Make sure the bank balance never goes negative, and for a good touch show the loan repayment as a separate line item. This shows the banker that you understand priorities.
Collateral may be needed to satisfy the lender’s angst about repayment of the loan, and unfortunately most small businesses have too few assets to satisfy this need. Many entrepreneurs are forced to pledge personal assets such as their home to allay the bank. This may seem scary, and it is, unless you’re really sure of your success.