So many business owners fail to prepare to meet with their banker when seeking a loan. Often the initial conversation goes like this:
Business Owner, “I need a loan.” Banker, “How much do you need?” Business Owner, “I don’t really know. How much will you lend me?”
This may sound like a joke, but this happens on a daily basis at banks around the country. For you to be successful securing capital, you need to understand what a banker needs and what will help them get your loan approved.
Always remember, bankers make money by loaning money, and they want to lend money whenever possible. The better prepared you are to show you are a qualified candidate, the more likely you are to secure funding. Here is a list of issues you need to understand before you meet with your banker to discuss borrowing money for your business.
Bankers need a business plan from you. They have to understand your business’ products/services, your customers, your marketing plan, and how you plan to make your business work. A business plan gives them this information in a narrative format, as well as a numerical story.
There is an old saying in the business world: “Don’t bet on the horse, bet on the jockey.” The bankers want to know you and your employees have the experience necessary to make the business successful. If you are missing this key ingredient, don’t be surprised if the banker says no.
Cash or other assets to invest
If you are starting a business, please don’t ask the banker to do it all. You must come to the table with some money or assets to invest in your business. As for the percentage of the deal you must have, it varies by business type, business loan and other business conditions.
Cash flow/repayment capacity
Please truly understand how you are going to pay back
the loan. If you have a secondary source that is not related to the business, then your banker will look more favorably on your deal. However, many times the business will be the source of repayment; so it is important you can verify the accuracy of your revenue and cash flow projections.
Know your credit score and what is on your credit report. If there are credit problems or inaccuracies, clean them up before meeting with your banker. In the past few years, credit score standards have become tighter. So, when possible, before meeting with your banker, ask them if their bank has a minimum credit score requirement and make sure you can meet it.
The banker wants to know what assets or items of value you own that they can take from you and sell if you don’t pay your loan back. It’s nothing personal. They just need to reduce their risk and make sure they can get their money back through either your payments or by selling your assets. They are not investors or your risk partner. So it is important to know how they calculate the collateral value of common assets. Again, each bank is different but here is an example: The typical collateral value on new equipment is approximately 50
percent of what you paid for it.
If you can’t manage your home budget, chances are you won’t be able to manage your business budget. The signs that tip this off to your banker are large credit card debt and low credit score. Most banks require a home budget to be submitted with your business plan.
Past aggressive tax strategies
Nothing kills a deal faster than telling the banker how your business made money the last few years and having tax returns that show losses or little profit. The bankers must base their decision on tax returns and not on what you claim you made. If the two don’t match, they know one is not accurate and they will use the federally documented numbers.
So remember, when you go to meet with your banker about a small business loan, understand what they need and be prepared to deliver it.
Lynn Vos is area director of the University of Georgia’s Small Business Development Center. Contact her at 912-651-3200 or firstname.lastname@example.org.
Vos, Lynn (2012, March 17). Small business: Be prepared to meet with your banker. Savannah Morning News. Retrieved from http://savannahnow.com/exchange/2012-03-17/small-business-be-prepared-meet-your-banker