For many entrepreneurs, applying for a bank loan is a frustrating experience. Somehow, you just know that in general the banker would rather take a loan application from a doctor, a dentist, a lawyer or just about anyone other than an entrepreneur. It's like the banker goes into a defensive crouch whenever you appear.
Normally bankers rely on the six C's: collateral, cash flow, character, conditions (business), capital and capacity. Most banks know that typical entrepreneurs do not bring the necessary documents when they come in for a loan, so it's easy to send them away to gather a bunch of information, knowing that they hate doing that and will probably not be back. The banker can then concentrate on more traditional loans.
So, here is a list of things to have and to do when applying for a business loan from a bank.
1. Be a customer of the bank with at least a checking account established. Let the loan officer know you are already a client. Find out what his loan limit is so you don't waste each other's time if the loan limit is too low to meet your needs.
2. Have a two-page executive summary so the banker can understand quickly what the business is and how it will generate cash flow to repay the loan. You could give him your entire business plan as additional evidence, but the banker probably won't take the time to read it.
3. Have a cash flow statement that shows the use of the bank's funds and exactly how they will be repaid.
4. Have the following documents ready to present to the banker at the first meeting: financial statements on the business for three years, including statements for yourself and any co-signers, with original signatures at the bottom; tax returns for three years for that same group of people; description of the collateral that is being offered plus valuations; references from current lenders, vendors or creditors; rsums on yourself and any co-signers you may use.
Building a long-term relationship with a banker is much more important than saving a half-point in interest by shopping for rates. You will do better to find a loan officer who has a lending limit that fits your needs, has been in the business more than five years and has experience lending to entrepreneurial businesses. Sometimes smaller community banks will be more appropriate for your needs since their employee rosters tend to be more stable and their loan officers are usually there year after year.
The trick is to go way beyond the banker's expectations. Instead of going in to tell a story about your business, differentiate yourself and your business by having all of the questions and documents that the banker will ask for before you ever meet. Always be totally honest with the banker and give a once-a-month update in writing that includes your most recent financials.
That's the best way to pull them out of that "defensive crouch."
Joe Olivier is the former chairman of the board of Bonneville Bank in Provo and is affiliated with the BYU Center for Entrepreneurship. He can be reached vie e-mail at cfe@byu.edu.