Bankers Don't Bite

J. Tol Broome Jr. -- Gifts & Decorative Accessories, 1/1/2001

I am convinced that most small business owners are scared to death of bankers. They view loan officers as stuffed shirts who exist for the pleasure of foreclosing on little old ladies on Christmas Eve. But banks don't make money unless they make loans. What do you call a loan officer who never makes a loan? Unemployed. Since over 80 percent of businesses in America are considered small businesses, banks are very active in financing small business ventures.

Given this fact, your chances of obtaining a loan for your business are good. But you have to know how to go about it. Following are eight tips that will help you tap into banking resources.

The Business Plan

Preparing a business plan is vital. A good business plan should include: 1) information on the history of the business, 2) an industry analysis, 3) the background of management, 4) plans for the future, and 5) the dreaded numbers section.

It's not as bad as it sounds. First, the narrative section (Steps 1 through 4) doesn't have to be War and Peace. In fact, most bankers appreciate conciseness, so the narrative portion can usually be completed in three or four pages.

For the financial part of the plan, include historical financial information (go back at least three years if your business has been around that long), as well as projections for the future. The banker will need to see that you have thought through the potential ramifications of upcoming growth in terms of its impact on your company's bottom line.

The projections can be pretty simple, but they must be based on reasonable assumptions. For instance, if you have grown 25 percent in each of the last two years, it is probably unrealistic to project a 100 percent sales increase for the upcoming year.

Most importantly, the projections should demonstrate that your business will operate profitably in the future.

If you are unsure of exactly where to start with your business plan, try your local library or bookstore; they should have a number of books and other reference materials that will help you organize your plan.

Community Contacts

When you are seeking bank financing, it is a good idea to tap your local community contacts. For example, your accountant may be very helpful in the preparation of your business plan (particularly the section on finance). Many communities also offer free business counseling services through organizations such as the Service Corps of Retired Executives, Small Business Technology and Development Centers, the Small Business Administration, small business incubators, and local colleges.

Owner Credibility

Many gift shop owners are reluctant to toot their own horns, but it is necessary to do so when seeking bank financing. It is important for the storeowner to establish credibility by providing the banker with management background. This can be communicated both within the business plan and during one-on-one contact with the banker. Every loan officer knows that the strength of a company's management can make or break a business. So lenders will be interested in knowing why you think you are qualified to sell gifts and decorative accessories.

Don't worry if you are the only "manager" in your business. Many small businesses have only one key executive. As long as you can prove to the banker that you have the qualifications to run your business profitably, you shouldn't have any problem establishing credibility.

Equity Requirements

Bankers pay very close attention to the capital base of an existing business during the financing process, because if a store already has a large amount of debt, the loan officer will be reluctant to add to it.

For a corporation, most banks measure capital strength by calculating a debt/worth ratio. In layman's terms, this is simply the amount of total debt versus the amount of equity. If this ratio is higher than about 3:1, a red flag usually goes up.

For a proprietorship, equity is harder to measure, because the business and the business owner are legally the same entity. If your business is organized as a proprietorship, your personal financial statement will become more important, because the banker will want to see that you are building personal equity through the profitability of the company.

Collateral Requirements

Any discussion about borrowing money will inevitably get around to the $64,000 question: What do you have to offer for collateral? If you are ready with an answer, you'll be ahead of the game. Simply make a list of everything you can offer for collateral, with a description of each asset and an estimate of its value.

Repayment of the Loan

The most important component of any loan request is the repayment source. If the bank doesn't get repaid, it doesn't make any money, so this issue is critical to the loan officer. Again, before you go to the bank, give some serious thought to the way in which you will repay the loan. If you have doubts about your ability to repay, maybe it isn't the right time to borrow funds. If you are confident about your store's ability to generate sufficient cash flow to repay the loan, then you will demonstrate to the loan officer that you understand what is most important to him!

Downside Risk

Every business decision has some downside risk, and it is important that you address the potential pitfalls in your loan request. The trick is to cover the potential drawbacks without sounding too pessimistic. The key is to show the banker that you have considered the "what ifs" and that you have a Plan B. For instance, let's say you are seeking a loan for inventory that you hope to sell fairly quickly. Your fallback position might be to conduct a sale on any unsold inventory to ensure that it is sold in a timely manner. Show the banker that you have a contingency plan that will result in the bank being repaid as agreed, no matter what happens.

Red Flags To Avoid

There are a number of red flags that bankers look for in any loan request. You can avoid them by observing the following rules.

First, know how much you want to borrow. If you respond to the question, "How much do you need?" with, "As much as you will lend me," you demonstrate a lack of planning and almost guarantee a denial.

Second, be sure that your loan request package is well organized and neat. A messy submission will be frowned upon.

Third, do not defer all financial questions to your accountant. Lenders cringe at the thought of a business owner who hasn't taken the time to understand the financial side of her business.

Finally, if you keep everything simple and concise, you will be able to focus on what is really important. This should go a long way toward convincing the lender that your request is worthy of a "yes."

J. Tol Broome Jr. is a credit risk manager at Centura Bank in Greensboro, North Carolina. He has been in banking for 16 years. His freelance writing credits include Start Your Own Business , an Entrepreneur Magazine publication.