Your company is growing, entering new markets, developing and supporting new products and services. Cash is tight and getting tighter each month. As the owner, it's up to you to face a truth you have been avoiding. You need money. Where do you go to find it?
While there are numerous financing choices for small- and medium-sized owner-managed businesses ranging from asset-based financing to factoring to the SBA, most company owners are going to see a local bank first.For business people, a visit with their banker is in the same category as a trip to the dentist. Necessary, but not something you look forward to. Even though you have exactly the kind of company the bank advertises it supports, a successful, locally owned small business, you are wary and unsure of the bank's commitment to your company. Banks possess a forbidding mystique that can intimidate even the most experienced business person.
Your meeting with Mr. or Ms. Banker seems to go well. Three days later you get a call from the bank. The loan committee has denied your request. What do you do?
Bankers turn down thousands of company owners just like you every business day. Unfortunately, it's a case of what best can be described as "professional" lender match from the start.
The secret to dealing successfully with banks is to understand their thinking. Business owners and bankers are natural opponents. They are at opposite ends of the risk-reward continuum. Owners are flush with dreams of growth and future riches. Owners just "know" they will be successful, current circumstances notwithstanding.
Bankers are professional balloon busters. For them the glass is not half full, it is half empty and likely to go down even further.
A business loan is a risky type of loan for the bank. While the owner's upside to a loan may be a surge in revenue and profit, what's the bank's upside? That they will get their money (really, their depositors' money) back plus a little interest? That's not much of a reward for making the loan. Business owners who look at things from the bank's perspective are better prepared to make a solid loan proposal.
Have you ever thought of why you never get a chance to meet with the loan committee? No, it's not because they are too busy. It's because the bank doesn't want nonfinancial issues like people, personalities and your persuasiveness to cloud the bank's judgment. Your financial information has to stand alone. Bankers judge you on your financial performance. Period.
No matter what bankers may say, the first thing bankers look at is the annual profit shown on your financial statements. This is the benchmark of your success in their mind. Nice profit equals smart business person. Low profit (loss!) equals dumb business person. No amount of explaining can undo the damage a poor profit figure does to your image as a successful company builder. Get your profit as high as you can before you meet with the bank. Recast your earnings to show the bank your maximum earning power. Bankers understand that loans have to be repaid with cash generated from profitable operations. You should understand this, too.
Bankers want to see specifically what you are going to do with additional funds. Here you have an opportunity to set yourself apart from the competition, and you are literally competing with other borrowers for the bank's funds, by showing the bank exactly how you are going to use their money. You are going to use their money to make more money. All bankers are capitalists or they would not be in banking. They want to see their capital grow and make more capital. Demonstrate to the bank why your use of their money makes good business sense.
Watch out for projections that are wildly optimistic or differ markedly from industry averages. Bankers have a copy of Annual Statement Studies published by Robert Morris Associates on their desk. This book details the operating ratios of companies in every industry you can imagine. If other companies average 35 points gross margin, you won't impress the bank by telling them you plan to achieve 60 points. They'll think you are nuts.
Bankers like to loan money when they are convinced that your use of their cash will generate more cash for you. Unless you can demonstrate that these borrowed funds will ultimately sow the seeds of additional funds in the form of company profit, don't bother your banker with a loan request. He or she will want to save the bank's money for the customers who can put it to best use. And best use is always money making more money.