Business leaders have often heard the complaint that bankers are not risk takers, but rather they are risk hedgers. You might even know the old joke that the best way to get money from a bank is to not need it.
While it is true that banks are typically more conservative than other investors, your local financial institution is still an excellent source of capital and will likely provide a helping hand when convinced that the reward (interest rates) outweighs the risk (loss of capital).
Accordingly, the following provides a general outline of what you should know and be prepared for in your attempts to secure financing from your local financial institution.
- Have a solid business plan. The plan should be clear and concise, easy to comprehend and communicate.
– What your company does.
– What it has accomplished and plans for future achievement.
– What products and services it sells.
– To whom it sells.
– Challenges and obstacles.
- Existing businesses will ideally have three years of quality financial statements that will inspire confidence. Your financial statements should:
– Be prepared by a professional accountant.
– Show profits; if the company is not profitable, be prepared to provide an explanation.
– Be an accurate accounting of the business’ actual performance; banks do not want to hear about cash.
- Both existing and new businesses should provide realistic projections of likely financial performance: These projections should:
– Cover a period of three years.
– Include a Profit/Loss Statement and a Balance Sheet.
- If you have a new business, make sure that your projections:
– Do not show you making money in the first month; banks recognize that businesses do not make money right away.
– Are realistic; projections showing the business going from zero to a million in one year are discounted and discarded.
– Benchmark against industry data; make sure profit margins are consistent and expenses are in line.
- Clearly identify and document what the financing will be used for (equipment, working capital) and how the addition of the financing will improve your business.
- Specify how the provided funds are going to be repaid and what the desired terms and conditions are for repayment.
- Sell yourself; banks make loans to the people behind the business.
- Identify your personal financial situation which will include assets that can be utilized for collateral.
– Be prepared to personally guarantee the loan; this may include pledging your house and other assets.
– Have cash to put into the business with the bank; banks typically require 10% - 20% equity if they are providing financing for equipment or acquisitions.
Your Loan is Approved; But Don’t Celebrate Yet
Obtaining loan approval from the bank is only the first part of your relationship with your banker.
- Thoroughly review all loan documents and understand them before you sign. Consult your lawyer or accountant if you have any questions.
– Review the terms: make sure the rates, amortization length and the payment structure is what was agreed upon.
– Review the covenants: identify your operating obligations as far as cash flow requirements, and debt/equity ratios.
– Understand the fees and penalties associated with the loan: Are there prepayment penalties; fees for being out of covenant; what are the costs (legal and otherwise) that you are required to pay for to close the loan?
- Maintain close contact with your loan officer. It is a good idea to give them progress reports -- the bank now has a vested interest in your success and will want to be kept current.
- Communicate problems. Bankers, don't like surprises, particularly if the news is bad. So, make sure to contact your banker if you encounter any problems.
Sorry, Your Loan Was Denied
Sometimes the bank will say NO! If so, remember the following:
- Don't despair; a "no" today doesn't necessarily mean NO forever.
- Don't take it personally – it’s just business.
- Be gracious; burning bridges is never a smart business decision.
- Ask the banker to explain "why" your loan was not approved.
- Don't get defensive, seek information so that your next proposal addresses and corrects any deficiencies in the current application.
If you have any questions about this white paper, contact Mike Vann at the Vann Group. The Vann Group is a business advisory firm that assists companies in transition to unlock their value. We provide practical business counsel to transitional companies through a customized approach that is founded upon our passion for business and our family′s 150+ year entrepreneurial track record. No other firm can provide the breadth and depth of services like the Vann Group, including strategic planning and business development, merger and acquisition advisory services, leadership succession planning, organizational development consulting, and crisis and turnaround management.
