The writing instructors all tell us that any good paper or article should have a value statement up front so that you, the reader, see it worth your time to read the material. Well, this month the value statement is simple. You will spend less, have less hassle and make your life significantly easier if you’ll spend the next five minutes with me.
We’ll get right to work. There are two basic structures for businesses to borrow money. Here’s the rub. Lenders love to lend money to businesses that have pristine credit, that they understand and that they can go grab and resell if the need ever arises. That is a problem for us. Lenders don’t really understand our shops, other than maybe the real estate, and there’s little that will bring any money in an auction or other sale if they need to come looking. So, while you may very well pass the credit test, the rest will, no doubt, be sketchy at best.
So, you may choose from either a line of credit (suspect most have one), which allows you to borrow up to a predetermined amount, or any part, short term on a revolving basis. The lines are typically issued at an interest rate lower than longer notes. But, be careful. Miss a payment and watch your interest rate shoot up quickly. And, a line may be withdrawn at most anytime, especially if you fall below your collateral requirements, which are reviewed frequently.
The second type of traditional business lending is the term loan. It’s a lump sum loan paid out to the borrower all at once and payable at regular intervals (not always monthly) for a specified number of years. Generally, the amount borrowed exceeds $100,000. Within this group are intermediate notes, generally payable under three years. Or, the long-term loans, which are larger and used for things such as buildings or major equipment purchases. The loan is secured with collateral. And, as one might expect, the loan-review process is a bit more involved.
One often overlooked loan option is applying for a Small Business Administration (SBA) program loan. In fact, these are not loans from the SBA. Rather, they are term loans through banks where a portion of the loan amount is guaranteed by the SBA. As a result, you may be able to get a larger loan than what normally may be extended to you. As a rule, the loan terms are more attractive in terms of rates and loan design.
Many people I have spoken with seem to think the SBA loans are a lot of hassle and don’t try for them. However, the real fact is that the process is quite simple, the difficulty may be the lender’s level of experience and familiarity with the SBA requirements. Moreover, if you choose the SBA route, there are people available to you to assist you in assembling your loan package that you submit to the lender.
Your regular lender/bank may very well be experienced with the SBA program. It pays to ask since many may not mention this option. The SBA also has identified and works closely with Preferred Lenders. With their experience with the SBA program, Preferred Lenders typically shorten the process and reduce paperwork for you. For complete details on Preferred Lenders and the SBA program, see https://www.sba.gov/category/lender-navigation/working-with-sba. This link has a really helpful FAQ listing, along with many other resources.
In quick summary, the major points:
• Lines of credit – short term, lower interest rates generally, flexible and draw able as needs dictate
• Term loan – bigger, longer term, one-time distribution with scheduled repayment, higher interest rates than credit lines as a rule
• Do not overlook SBA opportunities
On to the lenders. In preparing for this article I spoke with a number of commercial lenders. In general, there are a number of things a lender wants to see in your application package:
• Cash flow
• Credit history
• Quality of documentation
• Character or borrower
• Collateral
Lenders are stuck between a rock and a hard place. On one hand, to stay in business, lenders must lend money. It’s your interest dollars that drive their revenue. But, they are also constrained by shareholders or other investors to not make silly loans. And, the lenders must also use their own best judgment in determining what represents a good risk. It’s really a tough place to be! So, if you need dollars, do your best to help ease the lender’s concern wherever you’re able. You will be rewarded with a simpler process and quite possible better loan terms.
“If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that's the bank’s problem.” – J.P. Getty.
According to lenders, the best thing you can do is to start your loan process early. The first step is to establish a relationship with the lender. This one person may very well be the difference between loan and disaster. They must take your business and present you to the loan committee, whether it’s local or distant. It is immensely easier if the lender is able to present you as someone they know well. Adds a lot of credibility to the presentation to committee.
The next step is to start gathering your info. While there are no doubt differences between lenders, the basics typically include:
• Income statements projected 2 years
• Balance sheets projected 2 years
• Projected cash flow 2 years
• Personal and business tax returns past 3 years
• Business plan
As an extra twist for our industry, it is important to provide any EPA/DNR clearance documents and/or environmental studies for any property you are considering that may have been auto or industrial related. The lender needs to know if there’s any “oil under that there dirt.”
Once upon a time, I learned a really valuable lesson. I struggled through building my loan package. Took three trips to the lender’s office and it really wasn’t that big of a deal. What I learned is to have my accountant talk to the lender and construct the reports especially for the lender. The little bit of money I spent on the accountant was paid back many times by the time I saved!
This article has only skimmed the surface of borrowing money. There is much more to learn, and you’ll want to have a talk with your lender and accountant to see what’s going to be needed.
The last thing we want to address are the virtually surefire reasons you’ll leave your lender without a check. These are issues shared with me by lenders as real problem areas:
Stretching the facts or inflating your story – This was No. 1 on everybody’s list. In our attempt to look the best, and the pride in what we’ve accomplished, we may intentionally or inadvertently present ourselves or our data as something we are not. Rest assured that your lender will do a very thorough and complete review and investigation, especially if they are not familiar with you, and will dig out the real story. So, stay with the facts presented and exactly as you know them. This also helps build credibility in things like your projections.
Avoid a negative or apologetic presentation to your lender – the opposite of above. You will avoid this by simply sticking with the facts.
Talk risks – While walking the tightrope that is not sounding negative or inflating your story, you must be willing to identify and discuss risks involved for the lender and what you have done to minimize or eliminate the risks. You may be certain the lender sees every risk you perceive and likely many more. You add huge credibility to your presentation to be upfront with the risks, as long as you come right back with your plan.
Dress to the occasion – There’s an old joke that everyone knows accountants, attorneys and lender/bankers these days by the simple fact they are wearing a tie! Let’s face it that our industry does have a certain stereotype. You will further that stereotype by showing up with a day’s worth of grime on a uniform. Instead, a nice pair of slacks with a polo shirt and nice shoes, or a nice pant suit for women, shows you are a business person who means business.
Take it easy on the lender – Realize that the lender has a process to follow and you being pushy isn’t going to help matters and will likely tick off the lender. You should ask about the process and when to expect the next action, but once is enough.
Dress up your presentation – Lenders share that they have had to make their way through presentations out of order, covered with greasy fingerprints, spilled coffee, food, you name it. Keep it clean, in order with a nice cover.
Know the banker will look for REAL collateral – Your inventory and blue sky aren’t really worth much in the mind of the banker. They look for real estate like your existing building, assuming there isn’t a load of debt carried on the building. Most always they will go for your personal home. You will likely not have the fortune to avoid this, but it is worth asking if you are throwing in a larger down payment, and you have some equity in your business property.
Get a reference if you are able – Lenders like references, assuming they are good risks!
Again, while a pretty complete list, there are other things to keep in mind, but you will no doubt make it to the top of the lender list if you follow these simple guidelines “from the horse’s mouth.” It will really distinguish you from the many others in line for loans.
“Money, if it does not bring you happiness, will at least help you be miserable in comfort.” – Helen Gurley Brown
There is one basic fact in your favor. The bottom line for the lender is that they don’t make money unless they lend money and collect interest. So, if you present yourself as a good risk and worthwhile business, you will get money.
Good luck with your loan application. If you use some of this, and it works for you, please let us know. We’ll be thrilled and will summarize in further articles so all get to learn from our experiences.