Did you know that in many instances when a banker says no to a loan request, the reason is that the borrower simply did not provide the information necessary for the banker to say yes? Most banks will not make an effort to understand a business if the owner has not made a concerted effort to explain, in an organized and concise manner, the following:
- The company's business: what the company will do with the money it wants to borrow
- How the company intends to repay any borrowed funds
Let's take a look at the basics that every small-business borrower should cover to ensure bankers view their business in the best possible light.
Who Are You?
The first rule of every banker is "Know your customer." This means that before a bank can make a loan, they must have an in-depth understanding of the business, including its history, its future, its products, its customers, its suppliers and its owners. The company's business plan will normally include these topics.
For smaller businesses, the bank will rarely distinguish between the company and its owner. This means the bank will want to understand the personal financial circumstances of the owner, including the details of the owner's net worth and cash flow (just as the bank needs to understand the finances of the business).
The bank will also want to understand the owner's character. The bank will want to examine the owner's personal credit history on the premise that the owner will manage the company's debt similar to the way they manage their personal debt. Personal guarantees will almost always be required. A bank will never consider taking on the risk of lending money to a small business whose owner will not accept the same risk.
The Loan Package
Follow these tips to ensure your loan request stands out from the crowd:
- The package must be well-organized.
- The package must be complete. Requesting additional information is time-consuming for both the bank and borrower.
- Make it easy for the bank to understand the business.
- Carefully explain how the borrowed funds will be used.
- Carefully explain and document how the funds will be repaid.
- Any required forms should be neatly and completely filled out.
- Be prepared to offer the bank a lien on all the company's assets.
Following are the supporting documents that should be included with every loan request:
- Two to three years' worth of company financial statements prepared by an independent accountant
- Two to three years' worth of company tax returns
- Latest accounts receivable aging (if applicable)
- Latest accounts payable aging
- A list of the five to 10 largest customers, indicating each customer's percent of total sales if more than 5 percent (not applicable to retail businesses such as restaurants or shops)
- Personal financial statement of owner(s)
- Two to three years' worth of personal tax returns of owner(s)
- A company business plan
A business plan is the company's plan for the future. The bank will want to know whether the company intends to grow and how it will achieve its growth objectives. The bank will want to know how the company will compete and how it will function in bad times. The business plan allows the banker to become your "partner" and makes it easier for him to say yes.
Bill Fiduccia is a founding partner of BizPlanIt, a professional business planning consulting firm that helps early-stage, emerging-growth and established companies prepare clear, concise and compelling business plans that get results.