Before You Meet the Banker

" Six Questions  You Must Answer"

hen was the last time did you attempt to borrow money for your small business? How did the loan officer treat you? Did he seem uninterested in your loan application? Or more than likely, did he placate you by saying, "sounds great, we will get back to you." --but never did. What the banker wanted to say, but did not, was that you are unprofessional and unprepared, and that he cannot entrust you with either the bank's money or his own reputation.

To increase their chances of securing financing, small business owners must first impress the loan officer. But, from the loan officer's perspective, typically loan prospects are un-bankable. Usually, they do not meet all the criteria that the bank uses to approve business loans. For example, there might be problems with the borrowers' credit. However, there is a saying that banks do not lend money to businesses, but to people.

Therefore, even if you are not a perfect candidate for a loan, it is possible that you can win over the loan officer by projecting an image of a very competent business owner. To accomplish this feat, not only must you be professional when meeting the loan officer, but also you must be prepared to answer the following six questions:

1. How much do you want? -Nine times out of ten, unprofessional loan applicants will answer with the following question: How much can you lend me? The next thing that they will hear from the loan officer is "it was great talking with you." Business owners should answer this question with an exact dollar amount. Some professionals might advise you to borrow more than what you need. In this case, if the bank gives you less, you will get what you really need. On the other hand, some people advise that you should borrow less than what you need, then try for more later. But, both of these strategies can work to your detriment. A good loan officer will figure out for himself the cash needs of your business. Therefore, if you ask for too much, he might believe that your are trying to get the extra money to pay for other hidden expenses, for example, money to pay off credit card bills. Conversely, if you ask for too little you will come across as not understanding your business's cash needs. In any case, employing either of the above strategies will tarnish your image of a solid businessperson. Therefore, in order to win the respect of the loan officer, the best approach is to ask for an exact figure, plus an additional amount for contingencies or miscellaneous items.

2. What are you going to do with the money? - Generally, there are three ways by which to use the proceeds of a business loan: Purchase additional assets, pay off existing debt or pay for revenue generating expenses, like marketing. In my experience, of the above three use of proceeds, it is easiest to secure a business loan to purchase assets. Conversely, it is most difficult to get a loan to repay an existing loan, especially in cases where the borrower is having problems paying the existing loan. When requesting a loan, you must submit a detail breakdown of how you will be using the money. For example, if you are purchasing computers, list what kind, the seller and the prices. It is also advisable to include in your loan proposal an invoice from at least 3 suppliers of the item.

3. What good will this loan do for your business? -Too often business owners seek to borrow money because their businesses get into trouble. Because bankers hate to "throw good money after bad money," your loan request will most likely be denied. In the eyes of a banker, you are borrowing to cover up an inability to effectively manage the business. For example, if most of your receivables are over 90 days old, then your business does not need a loan. Rather, a better collection system is needed. Banks prefer to lend money for productive uses-- that is uses of the loan proceeds that will directly result in increase revenue. Therefore, a business loan to service a new contract or to purchase inventory for a growing business will receive preferential treatment than a debt consolidation loan.

4. How will you re-pay the loan- This is perhaps the most important question. Therefore, it is important that the business owner clearly identify the source from which the loan will be repaid. In most cases the primary source of repayment should be from the proceeds of the business.  In this case, you must provide the banker with financial projections that not only show profitability, but also positive cash flow for the duration of the loan. To make the loan request even stronger, you can include in the proposal a secondary source of repayment, like income from a current employment or a real estate rental. 

5. What are the terms of the loan- The most important terms of a business loan are the repayment period and the interest rate.  If the business's cash need is temporary then, the business owner may request short term financing like a line of credit, which in most cases is payable in full at the end of the year. Nevertheless, most small business loans are medium term financing, where the repayment period is 5 or 7 years. However, if the purpose of the loan is to purchase fix asset, for example equipment and real estate, then the repayment period is usually from 10 to 20 years. The interest rate is usually stated as prime plus a certain rate. For short and medium term loans, you should request a rate of prime plus 2%. In any case, the rate offered by the bank will be determined by your credit worthiness. If you are not an "A" category borrower, then you probably will have little room to negotiate the interest rate. 

6. What happen if you cannot repay the loan? -Typically business owners are overly optimistic. They only talk about the positives as if the businesses are "bulletproofed". But, banks have been burnt by enough bad loans to know better. To make a good impression on the loan officer, you need to show a balanced picture of your business. Take time to highlight the things that could go wrong with the business venture, and the contingencies that you have in place to deal with these possible problems. In addition, business owners must show a willingness to pledge business or even personal collateral to secure the loan.

Ultimately, business owners' ability to secure a loan will depend on their meeting the bank's lending criteria. However, the reality is that at the very best most small businesses do not meet all these criteria. In these cases, banks will rely very heavily on the borrower's character. By answering the above six questions, borrowers will be well on their way in bolstering their image in the eyes of a banker.