Small business owners are good at managing their companies but generally not as adept at applying for business loans. It can be a trying time for most business owners who feel they really need to be a financial genius to figure out the loan process.
Since first impression are the most lasting, it is important a business owner makes a great impression on their future lenders. Unfortunately this rarely happens. Why? The business owner is not prepared for the process.
At first, things seem easy. The business owner meets with the lender’s business development officer who is trained to make prospective borrowers feel like part of the family. Often business owners are fooled into thinking that just because business development officers like them, they are getting the loan of their dreams. So they put their guard down and don’t prepare a good loan package for the real audience – the credit and loan committee of the lender.
What should business owners prepare for the credit and loan review? Below is a short list of items that should be ready to go if the objective is a good first impression and the highest possibility of getting the loan requested.
Short description of the business. What does the business do or sell? Who are the customers? These are the very first question a lender will ask. It seems like common sense but most owners forget this step. The business description should include short sections describing products and services, customers, competition, history, management, and ownership. The business description doesn’t have to be long or complicated. A good test of whether or not the business description works is to give it to a 5th grade student, and see if after reading the description the 11 year old can describe the business to his or her friends. We may not be as smart as a 5th grader but if they don’t “get it” then the description doesn’t work.
Financial statements. Banks will require three years of historical financial statements (usually audited or reviewed) and year to date financials including actual to budget and actual to prior year should be presented. Asset based lenders, such as a factor, will require much less historical information since they are making a credit decision based on what will happen in the future. Regardless, the financial statements need to tell a simple story so that the credit staff can quickly calculate EBITDA, tangible equity, debt to equity, fixed charge coverage, quick ratios, and liquidation values from the sale or collection of assets. It’s even better if you calculate these numbers and ratios for the lender before being asked.
Projections. While the past is important, the future is more important. Lenders want to know how the business is going to use the proceeds of the loan and how the business is going to grow. No lender wants to lend to a business on the verge of failure. Projections should be easy to understand and should be presented on the same basis and using the same line items as the historical financial statements. Don’t make up unattainable forecast sales and/or margin improvements. Lenders will see right through them and the business owner will quickly lose any credibility.
Accounts receivable, accounts payable and inventory agings. Ask the lender if they want summary or detailed aging reports. All lenders are different and it is best to give them just want they want. Remember is it quality over quantity.
Tax returns. Tax returns are important because they validate the reasonableness of financial statements and projections. Not all lenders will understand the detail in the tax returns but you can sure bet they want them.
Personal financial statements. The business owners and key members of executive management should provide personal financial statements. Prudent lenders will require this information and it makes a much better first impression if the information is provided without being asked. After all, no one wants to lend to a company with a management team that can’t manage their personal life.
Get the “bad” information out front and center. Whether the “bad” information is about the owner, company or shareholders get it all out in the open and don’t wait for the lender to find it. They will dig up the dirt and not be too happy the information was not forthcoming. Pretty much all lenders have access to data bases that provide “instant background checks” on people and businesses.
While it may seem like making a good first impression is hard, it can be done with a little forethought and preparation. Remember, even the best first impression doesn’t guaranty the loan will be approved but it certainly can’t hurt.