Getting a loan is sometimes harder than you think.
The company: International Musical Suppliers Inc.
Owner: Lisa Argiris
1997 sales: $3.5 million
1998 projections: $4 million
Loan specs: $1.5 million from Citibank
So you've got everything going for you: a strong track record, excellent management skills, a compelling business plan, and concrete goals for the future. Securing a loan-even from a bank known for being conservative-should be a piece of cake, right? Not exactly.
As Lisa Argiris learned when her original lender was unwilling to supply the additional capital she needed to start her Chicago-based mail order musical instruments company, banks don't always share your confidence in your business. Argiris contacted 10 banks during her search for a loan earlier this year, but despite her company's impeccable credentials, she had trouble finding a financial institution willing to approve a loan on her terms.
"All the banks were interested in me," says Argiris, 34, but the sticking point was the structure of the deal. "The banks were astonishingly poor at offering me what I needed and were looking instead at what they were comfortable doing." Some banks considered the amount requested too steep; others refused to offer competitive interest rates. But instead of settling for less, Argiris held out for more.
Good thinking. In the end, her company's assets and profitability impressed Citibank-she got everything she wanted from her inventory, mortgage and working capital loan. But the final deal came only after 16 weeks of searching.
What was the problem? For one, Argiris says banks have "cookie cutter" mentalities; most she approached use narrow formulas like debt-to-equity ratios to screen applicants, showing little interest in what her business really provided, its growth potential and its actual funding needs. Second, her company needed a lot of initial capital to produce income.
Argiris learned a lot from the experience. She recommends having a clear understanding of your needs before approaching a loan officer. "If you don't understand that," she says, "you might be persuaded to do things that aren't in your best interest but are in the interest of the bank, which can be devastating to your business."
A Loan At Last
The struggle behind one entrepreneur's executive housing loan.
The company: Corporate Suites at Lakeside LLC
Owner: Vickie Snavely
Loan specs: $550,000 from Bank of Floyd (in Floyd, Virginia); $399,000 from the SBA
Are business loans hard to come by? It depends on whom you ask. Vickie Snavely, for one, describes her recent loan search as "a nightmare." That's not what you'd expect from an entrepreneur who's run three successful businesses (a household amenities rental company, a window treatments business and a property management firm) for more than a decade.
But sometimes when you're new to the lending game, things don't turn out the way you expect them to. Snavely had never previously required loans of this magnitude to support her businesses. Then she decided to launch a fourth venture, a Salem, Virginia-based extended-stay facility (for travelers who need lodging for a longer period of time than the typical hotel stay but not long enough to warrant leasing an apartment). Since the project involved real estate and construction, she knew she couldn't move forward without an advance of nearly $1 million.
Snavely had a plan: She was sure if she sought financing from eight banks and 12 nonbank lenders, one would work out. Unfortunately, her strategy didn't account for discrimination or sexual harassment-obstacles she encountered that threatened her chances of getting a loan. She says one bank representative actually said he wouldn't work with a woman; another lost his job after he made a series of inappropriate comments to Snavely. During her two-year search, it seemed everyone she turned to considered her requests unreasonable. "This process has reaffirmed my opinion that it's still a man's world out there," she says.
In late 1997, Snavely looked to her local Small Business Development Center (SBDC) for help, and things finally started looking up. After landing partial financing from the SBA through Virginia Asset Financing Corp., Bank of Floyd in Floyd, Virginia, decided to provide the balance of her loan request. As for the final 15 percent of the necessary capital, Snavely was able to refinance some property to squeeze out the additional funds.
While Snavely is happy with the loan package, it still bothers her that she encountered so many serious obstacles in her search for funding. She's convinced, however, that persistence pays off; without it, she wouldn't have been able to move forward on this latest venture.
To entrepreneurs traversing the same path, Snavely recommends seeking help from local SBDCs as a first step, not as a last resort. She credits her eventual success to a rock-solid business plan, more than a decade of industry experience, an extensive customer base that provided letters of intent, and a reliable accountant.
When your loan is considered a gamble, try a nontraditional lender.
The company: Rainbow Materials Inc.
Owner: Ramón Carrasquillo
1997 sales: $12.5 million
1998 projections: $16 million
Loan specs: $4.1 million from Heller Financial Inc. in Chicago
When banks consider a business to be too high-risk, smart entrepreneurs seek alternative sources of financing-which is exactly what Ramón Carrasquillo did. His loan search spanned several months, and in the early days, he suffered rejection from a series of unbending banks.
Determined to expand his options, Carrasquillo looked to non-traditional, nonbank lenders-often known for their "riskier" clientele. But even among those lenders, he could only generate limited interest, and they wouldn't shoulder the entire project. Opportunity finally knocked, however; last year, Heller Financial came through with the capital this University of Texas, Austin, professor of civil engineering needed to suf-ficiently grow his ready-mix concrete business.
"With Heller, I was able to get a line of credit and financing for real estate, equipment, trucks and plants," Carrasquillo says. "So I was able to get it all [from one source]. The banks wouldn't even touch it. It was too risky for them."
Initially, Heller lent him $2.5 million; about nine months later, it au-thorized an additional $1.6 million. Carras-quillo's business has since experienced dramatic growth: He's constructing a new plant and also purchasing 10 additional mixer trucks and two delivery vehicles. That doesn't include the real estate or equipment costs, but as he explains, "It's a very capital-intensive business."
Overall, Carrasquillo says getting the loan was easier than he anticipated. The documentation Heller required was less complicated than he thought it would be, and its other requests were typical: copies of three years of tax returns in addition to a formal meeting to review his objectives, growth projections and company philosophy. "When they liked the idea, they did the rest," Carrasquillo says.
That's not to say he didn't encounter problems along the way. To start with, Carrasquillo had never established a credit history because he always paid his credit card bills in full. He also had a disappointing run-in with the SBA concerning the amount of paperwork required when applying for its loans. And because the banks he considered were so conservative, he didn't really stand a chance. As he says, "You either fit in the box or you don't."
Having successfully navigated the process, Carrasquillo acknowledges that steps he took early on-like consulting a trusted financial advisor-helped his case. He's also realized just how important it is to form a lasting relationship with your lender, even after securing the loan. Says Carrasquillo, "It's extremely important to continue selling your business to your financial institution. [I] keep letting them know how well the business is doing."
- Corporate Suites At Lakeside LLC, P.O. Box 928, Salem,
VA 24153, (540) 986-1234
- International Musical Suppliers Inc., 681 Graceland
Ave., Des Plaines, IL 60016, (847) 827-0707, ext. 227
- Rainbow Materials Inc., (512) 385-7676, firstname.lastname@example.org