In small business, there is rarely enough money on hand for healthy
operation and growth. There are several reasons for this.
Small businesses, by virtue of their market share, usually do not generate
large sums of cash on a consistent basis.
Small businesses, by virtue of their age,
do not yet have the stability that larger firms enjoy.
And small businesses, by virtue of their size, must continually fight to
grow and expand-if for no other reason, they must run twice as fast in
order to stay in the same place.
All of this means that small businesses are continually fighting for time.
*****And the battle for time is won with capital.*****
All things equal, and with enough money, you can compress 5 year's
growth into 2 or 3 years. The problem is, where do you get the capital you
need?
Willie Sutton, when asked why he robbed banks, is reputed to have replied,
Because that's where the money is.
Banks have long provided the capital that businesses need to grow and
expand. But they are tough when it comes to making that decision to risk loaning their money to your business.
In considering your loan request, banks are evaluating the risk. For you
to understand how they will come to their decision, it's useful to
understand the Five C's of Credit, long used to summarize the complex
methods bank use to evaluate your business loan request.
***Capacity***
Banks will look at your company and make a determination
as to whether or not you have the capacity to repay the loan within the
time frame under consideration. The chief means the bank will use here
is an analysis of your financial statements. They will be paying
particular
attention to your past cash flow and your profitability. In general, this
is where the numbers get crunched.
***Capital***
Lenders will check your operations to determine whether or not the
capitalization currently supports operations, including present debts.
They'll want to know if you risked your own funds by investing in the
business. And they'll want to see if you have a cushion to help you
ride out bad times or seasonal variations.
***Character***
Banks will want to get to know you. They'll check the credit report
of the business. They'll dig into your past decisions-and outcomes.
They'll want to know your background, together with how well it relates
to financial and business management. And they'll dig into how
well you've handled your personal financial affairs in the past.
***Collateral***
Usually, your bank will want to protect its investment in your
business with some form of collateral. Frequently this boils down
to real estate. Bankers want to know the value of the collateral, and
this can require an independent appraisal. In addition, nowadays,
banks might require an environmental assessment to determine
whether or not there is anything affecting risk.
***Conditions***
Businesses do not operate in a vacuum. When considering loan requests,
banks look at overall economic conditions-in which your business operates.
This includes any seasonal variations, industry specifics, and geographic
markets that might affect the future health of your business. When this is
done, the bank can draft the terms and conditions under which they will
grant the loan. In today's world, one of the conditions will always be a
personal guarantee-if you're not willing to lay your personal assets
on the line, why should they put theirs at risk?
Much of the Five C's can be included in your business plan.
(Do not think you'll get far with a bank unless you have
prepared a business plan.)
In addition to your past financial statements, you'll want to include
spreadsheets, projections, credit reports, tax returns, pertinent market
data, a personal financial statement, a resume of your background, and
any other background information to substantiate your loan request.
Finally, be prepared to answer some tough questions from your banker.
Banks want to know how much, what it will be used for, how you will repay,
and what collateral you have. These are not easy questions.
The amount of the requested loan will be one of the most difficult
questions for you to answer. Why do you need $50,000-as opposed to
$100,000? Will the amount you're requesting carry you through your next
stage of growth-or will you be back in 6 months looking for more?
Are you trying to grow too fast-risking the danger of collapse?
Is this loan a step you would take with your own personal
money-if only you had it? How carefully have you thought this
through-considering how every segment of your business is affected
by every other segment?
Once you understand what the bank will want to know, you can prepare
yourself to approach them for a business loan. And once you can answer
all these questions with ease, you can then call them for an appointment
