Entrepreneurs and business owners spend a lot of time and effort to find financing for their business. This is often a frustrating experience and leaves the business owner wondering what the bankers really want. While the process of finding bank financing can be time consuming and frustrating, you can significantly improve your chances of getting money you need if you understand some basic rules.
The good news-- Bankers really do want to make loans. That is their basic business. Most banks evaluate lenders based upon their ability to bring in new loans and new customers. This doesn’t mean the bank wants loans at any cost. A problem loan is a blemish on that lender’s record and reflects on his judgment. For the bank, it can mean a financial loss that will take twenty new loans to recover the losses. Your job is to convince the bank that your company is a good risk and will be a growing and profitable customer.
How can you improve the chances of getting your loan request approved? Here are some basics.
THE STARTING POINT
You need a written business plan. I know this is time consuming and difficult, but this is your company and your dream. This is where you explain your vision and how it will grow and succeed.
Here are some guidelines that I have found to be effective:
· Write a two page Executive Summary. This may be all the banker reads. Tell the whole story here.
· Limit additional narrative description of the company to 10 pages. Describe the background of the company, when founded, how many employees. Describe the product or service and identify the customers. Summarize the qualifications of the management team.
· Be specific about what you want. How much of a loan? What will you do with the money? When will you repay the loan?
· You must have equity in the company. The first ratio the bank evaluates is the “Leverage Ratio”. This is the measure of how much you have in the company compared to what you owe. The lower the ratio, the better. A ratio of 3 to 1 (Equity to Total Liabilities) is good. A ratio of 15 to 1 may be difficult. Your plan should show how you will build equity in the company over time. This is usually from ongoing profits.
· The plan must contain historic and projected financial information. This includes an Income Statement, Balance Sheet, and Cash Flow Statement. Prepare financial projections that show the company’s need for financing and the ability to repay the loan. A summary of historic financials and projected financial can provide a clear picture of the company's performance and it's future expectations.
· Include with all these numbers a detailed quarterly or monthly projection for the next 12 months. This will help to address any questions of seasonal profits and losses for the company during the year.
This may seem like a lot of preparation, but it will pay off in getting a cohesive and consistent loan request.