From the October 1999 issue of Entrepreneur

Last month, we met Rosemary F. Gozdowski, an ultrasound clinic owner in Sylvania, Ohio, who's endured more than her share of missteps and misfortunes in her loan history. Despite initially having strong credit and collateral, Gozdowski has been turned down by countless banks and small-business investment corporations. Although Gozdowski successfully secured a $50,000 loan, she failed to negotiate for longer terms, which would have made her payments more manageable. Later, she hooked up with a different bank that was subsequently put under a cease-and-desist order by federal regulators.

Doug Hood of Rainmaker Capital Corp., a former banker who now owns a loan-packaging and business-coaching service, reviewed Sylvania Ultrasound Institute & Men's Health Center's situation and said he'd only heard of one case worse than Gozdowski's in his 18 years of lending. What went wrong?

Cynthia E. Griffin:Why is Gozdowski, who is cash-strapped but obviously growing, getting no interest from banks?

Doug Hood: If she were throwing off profits, it might be different. But there's not enough collateral to warrant a banker taking that risk.

Griffin:What about her company's steady growth? Don't bankers consider that a good sign?

Hood: They probably do, but it takes a lot to go from losses to sustainable growth. What she's doing is good, but until she does a lot better, they're not going to take the risk.

Part of the problem here is that not many companies do what Gozdowski does. And that's the third leg of the [financial] stool: a lender's experience working with an industry. Any time bankers don't understand something, they tend to be con-servative or say no.

Griffin:Gozdowski went to Town Bank, whose officers convinced her to get an equipment loan and a line of credit through them rather than get an in-house lease from the equipment manufacturer. Soon after, she learned of the bank's cease-and-desist order. What complications arose from this?

Hood: Because the [loan and line of credit] tied up all her assets, it's now impossible for her to find someone to make a debt loan. Also, when a bank merges or your loan officer changes, the new people just might not want to do your type of loan anymore.

Griffin:Are there times when an entrepreneur should decline a bank loan offer?

Hood: Yes. If you went into a bank for a line of credit, and the banker said "Instead, I'll give you a term loan and you can put it in the bank and pay interest," this situation is not to your advantage. You'd be paying interest on money you're not using.

The problem is, most entrepreneurs don't know what to ask for. There's no training program [for obtaining loans].

Financing 1-2-3

What can you learn from Rosemary Gozdowski's trials and tribu-lations? If nothing else, how important it is for an entrepreneur to understand bank financing. Doug Hood of Rainmaker Capital Corp. offers a few guidelines:

  • Make sure you use the right financing strategy. If you need money for inventory, working capital, payroll expenses or other needs to be met within one year, get a short-term loan or line of credit. If you're going to purchase equipment, a building or other fixed assets, get a long-term loan. The goal is to match the term of the loan with the life of the product.
  • Know the difference between a line of credit and a term loan. A term loan is what you use to purchase a fixed asset. A line of credit can be used for ongoing and short-term expenses.
  • Ask how much experience the bank has had lending in your industry. If the bank is unfamiliar with your industry or has a history of losses when working with it, that can dramatically reduce your chances of getting a loan.
  • When you ask for a loan, it doesn't hurt to ask for 10 to 20 percent more than you need, in case the banker wants to lend less than your asking amount. But realize you'll have to adequately justify the amount.
  • Negotiate. If the loan is less than you need, tell the banker you'll be back and ask him or her to put in writing what plateau you must reach to get additional money. You can also try to negotiate loan fees. Offer a carrot-such as "If I bring all my company deposits here, can you reduce my loan fees?"
  • Don't be afraid to use your leverage to get what you need, but have the financial stability, cash flow and management experience to back up your position. This is no time for bluffing.
  • Get any verbal promise in writing. If it's not in writing, it didn't happen.