Getting a loan is sometimes harder than you think.
The company: International Musical Suppliers Inc.
Owner: Lisa Argiris
Founded: 1986
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
Founded: 1998
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.
Risky Business?
When your loan is considered a gamble, try a nontraditional
lender.
The company: Rainbow Materials Inc.
Owner: Ramón Carrasquillo
Founded: 1994
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."
Contact Sources
- 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, ramonc@rainbow-materials.com
This story appears in the September 1998 issue of Entrepreneur. Subscribe »
