OBTAINING A BUSINESS LOAN- KEY STEPS

Choosing a bank to obtain a business loan is one of the most important decisions a new or existing business will make.   A good lender relationship can sometimes mean the difference  between the life and death of a business during difficult times.   There have been cases where, other things being equal, one bank has called its loans to a struggling business, causing it to go under, and another bank has stayed with its loans and helped a business to survive and prosper.

 Some banks will make loans to business start-ups and early stage ventures and others will not.   Those that will not generally cite the lack of operating track record as the reason for turning down the loan.

 Before choosing and approaching a banker or other lender, the business owner should go through the following steps in preparing to ask for a loan: 

·         Decide how much growth the business wants and how fast growth will be, observing the dictum that financing follows business activity. 

·         Determine how much money is required and when it is required- to this end the business owner should:

1.      develop a schedule of operating and asset needs

2.      prepare a cash flow projection

3.      decide how much capital is required

4.      specify how the funds borrowed will be used 

·         revise and update the Business Plan for the business, including:

1.      the core ingredients of the Plan in the form of an Executive Summary

2.      a history of the firm

3.      summary of the financial results of the past three years

4.      clear descriptions of the market and products

5.      a description of the operations of the business

6.      statements of cash flow and financial requirement

7.      descriptions of key managers, owners and directors

8.      a rundown of the key strategies, facts and logic that guide the growth of the business. 

·         Identify potential sources for the type of debt the business seeks, and the amount, rate, terms and conditions sought. 

·         Select a bank or other lending institution that the business owner feels comfortable with and will be able to lend to requirements, solicit interest and prepare a presentation. 

·         Prepare a written loan request. 

·         Present the case, negotiate and close the deal. 

·         After the loan is granted, it is important that the borrower maintains an effective relationship with the lending officer.

Obtaining a loan is a sales job.   A business owner must sell himself or herself as well as the viability and potential of the business to the banker.   Throughout meetings with potential bankers,  the business owner must convey an air of self-confidence and an optimistic view of the prospects of the business. 

Questions that the banker is likely to ask the business owner are:

·         What are you going to do with the money?

·         Does the use of the loan make business sense?

·         Should some or all the money required be provided by other means other than bank loans?

·         How much do you need?

·         Justification of the amount requested?

·         How does the loan fit into the overall plan for financing and developing the business?

·         When and how will the loan be paid back?

·         When do you need the money?

·         What security is available? 

Lenders should therefore be prepared for these questions.   One of the best ways to answer these questions is by providing bankers with a well prepared Business Plan that contains projections of Cash Flow and  Profit and Loss and a Balance Sheet that will demonstrate the need for the loan and how it will be repaid.   A well prepared Business Plan is vital for a person starting a new business and seeking loan finance. 

After obtaining a loan, business owners should cultivate a close working relationship with their bankers.   Too many business people do not see their lending officers until they need a loan.   The astute business owner will take a much more active role in keeping a banker informed about the business, thereby improving the chances of obtaining larger loans for expansion, and co-operation from the bank in troubled times.   Some of the things that should be done to build a relationship are:

·         Sending annual financial statements

·         Sending product news releases and articles about the business or its products

·         Inviting the banking to view the business facilities, product development plans, and prospects for the business

·         Establish a personal relationship

·         Make every effort to reach the financial targets that have been set and discussed with the banker

·         Never surprise a banker with bad news- make sure that the banker sees it coming as soon as you do- if a future loan payment cannot be made, visit the banks and explain why the loan payment cannot be made.

If the bank or lending institution turns down an application for a loan, the business owner should ask himself the following questions:

·         Does the business really need to borrow now?   Can cash be generated elsewhere?  Are some expenditures not really necessary, and can some be reduced?

·         What does the Balance Sheet say?   Are we growing too fast?   Should we slow down our expansion?

·         Does the bank have a clear and comprehensive understanding of our needs?   Did we really get to know the loan officer?   Did we do enough homework on the bank’s criteria and their likes and dislikes?

·         Was our written proposal realistic?   Did it cover all information required by the bank?   Was it a normal request, or something that differed from the types of proposals the bank usually sees?   Did we make a verbal report for a loan, without presenting any written backup?

·         Do we need a new loan officer, or a new bank?

If your answers to the above questions put you in the clear, and your written proposal was realistic, call the Lending Manager at the institution you have dealt with and arrange the history of your loan effort, the facts, and the bank’s reasons for turning down the loan.