Banks and institutions that lend money have a lot of knowledge about
the success rate of small businesses. Bankers are often overly cautious in
making loans to small businesses. For that very reason it makes sense to
study their approach, even though it may seem discouraging at first
glance.
Banker's Ideal
Bankers look for an ideal loan applicant, who typically meets these
requirements:
- For an existing business, a cash flow sufficient to make the loan
payments.
- For a new business, an owner who has a track record of profitably
owning and operating the same sort of business.
- An owner with financial reserves and personal collateral sufficient
to solve the unexpected problems and fluctuations that affect all
businesses.
Why does such a person need a loan, you ask? He or she probably
doesn't, which, of course, is the point. People who lend money are most
comfortable with people so close to their ideal loan candidate that they
don't need to borrow. However, to stay in business themselves, banks and
other lenders must lend out the money deposited with them. To do this,
they must lend to at least some people whose creditworthiness is less than
perfect.
Measuring Up to the Banker's Ideal
Who are these ordinary mortals who slip through bankers' fine screens
of approval? And more to the point, how can you qualify as one of them?
Your job is to show how your situation is similar to the banker's ideal.
A good bet is the person who has worked for, or preferably managed, a
successful business in the same field as the proposed new business. For
example, if you have profitably run a clothing store for an absentee owner
for a year or two, a lender may believe that you are ready to do it on
your own. All you need is a good location, a sound business plan, and a
little capital. Then, watch out Neiman-Marcus!
Further away from a lender's ideal is the person who has sound
experience managing one type of business but proposes to start one in a
different field. Let's say you ran the most profitable hot dog stand in
the Squaw Valley ski resort, and now you want to market computer software
in Silicon Valley. In your favor is your experience running a successful
business. On the negative side is the fact that computer software
marketing has no relationship to hot dog selling. In this situation, you
might be able to get a loan if you hire people who make up for your lack
of experience. At the very least, you would need someone with a strong
software marketing background, as well as a person with experience
managing retail sales and service businesses. Naturally, both of those
people are most desirable if they have many years of successful experience
in the software marketing business, preferably in California.
Use the Banker's Ideal
It's helpful to use the bankers' model in your decision making process.
Use a skeptical attitude as a counterweight to your optimism to get a
balanced view of your prospects. What is it that makes you think you will
be one of the minority of small businesspeople who will succeed? If you
don't have some specific answers, you are in trouble. Most new businesses
fail, and the large majority of survivors do not genuinely prosper.
Many people start their own business because they can't stand working
for others. They don't have a choice. They must be either boss or bum.
They are more than willing to trade security for the chance to call the
shots. They meet a good chunk of their goals when they leave their
paycheck behind. This is fine as far as it goes, but in my experience, the
more successful small businesspeople have other goals as well.
A small distributor we know has a well-thought-out business and a sound
business plan for the future. Still, he believes that his own personal
commitment is the most important thing he has going for him. He puts it
this way: "I break my tail to live up to the commitments I make to my
customers. If a supplier doesn't perform for me, I'll still do everything
I can to keep my promise to my customer, even if it costs me money." This
sort of personal commitment enables this successful business owner to make
short-term adjustments to meet his long-range goals. And while it would be
an exaggeration to say he pays this price gladly, he does pay it.
