back to Business Plan Workshop index

To be successful, keep looking tanned, live in an elegant building (even if you're in the cellar), be seen in the smart restaurants (even if you nurse one drink) and if you borrow, borrow big.
- Aristotle Onassis, Greek shipping tycoon

BANKERS

If you're looking for a loan or line of credit over $100,000 or SBA-backed financing, you'll need a business plan. Bankers are almost the opposite of investors. They loan the money deposited from people who've been guaranteed to get it back with a little interest. The money was deposited with the idea that there's little risk, so bankers won't risk it. Bankers use the five Cs: Credit, Character, Cash flow, Collateral and Capacity-when evaluating a loan. They also look at a company from a deliberately pessimistic point of view to minimize the risk, so you must have good answers to their questions to demonstrate that you understand the issues.

Zen and banking

The old saying is that bankers will give you the money when you don't need it. This echoes the Zen philosophy: When you really want something, you don't get it. (And you can't not want something in order to get it either!) When you completely let go of something, it comes to you and you have it. When you don't need money, bankers seem to want to give you money. That's the way the world works.

Nobody wants anyone who's desperate. So, the more you try to get bankers to give you money, the more they don't want to give it to you. (The more you throw yourself at investors, the more they turn away.) Let's look behind the scenes.The nature of the banking business

For example: You ask for a $100,000 loan. The way the banking system works is that they mark up the money they pay depositors by about 2% (the spread). In the backs of their minds, they're looking at you and considering, "What if you can't pay this $100,000 loan back?" Remember, in business you have to make up any losses from profits, not sales. So, how much profit is lost if they lose your loan? Two percent at $100,000 is all the profit from five million dollars worth of loans. So if your loan goes bad, that means they lose the equivalent of all the profit they would make on five million dollars worth of loans they've made elsewhere.

They want your first born-

Now you can imagine why they scrutinize every loan. They look at how much business they would throw away if something went wrong with yours. That's why they're going to look at everything about you, including your character. Your credit history plays a big part here. They want to be sure you're the kind of person who's going to pay back the loan. They don't want to get left holding the bag because they'll lose all their profit. That makes it even more imperative that you know what you're doing in your business.

So what do you do? You've got to show them a track record. You need to prove that you can pay your loan back no matter what. That's also why they want collateral-it's insurance so they won't have to take it out of their slim profit.

Prerequisites for a bank loan-

A bank wants to see a track record of profit for the past three years which also means you have to have been in business for at least three years.

Banks are looking to finance growth, not cover for inefficiencies. Show them how you'll use the loan to improve efficiencies in your operation. For example, buying a printing press will save money over buying printing if you spend a fortune on printing. Then the loan would make sense. However, if cash is short because you're slow to collect receivables, then the loan doesn't make sense. If you could collect your receivables faster, you wouldn't need the loan.

They prefer a debt-to-equity ratio of less than 3 to 1. This is a banker's measure of risk. Bankers hate risk. The debt-to-equity ratio compares the amount of what you owe to what you own. Banks expect that you will repay your loan out of cash flow-show that you'll generate enough cash (not just profit on paper) to repay your loan. If you can show that the loan improves cash flow, so much the better.

Sandbag your projections by just enough
to assure that you hit your numbers.
- An anonymous banker

If you can hit your projections then apparently you understand your business and have it under control. You should have solid financials based upon conservative assumptions. Future projections should be conservative and show steady growth with profits over the next five years. Too much hype and too much projected growth equals too much risk.

Part of your financing package should always include a reasonable explanation of anything unusual in your credit report. I recommend including this explanation up front in your financing package because inevitably they will ask you about this unusual item on your credit report and you'll have to address it. If you want to speed the process of your financing, have this answer prepared in advance and include it with your package. If nothing else, at least a half page explaining the situation. For example, right now my TRW report has grown to about seven pages since I started my business. It got that way because bankers, investment firms, and finance firms have looked into my TRW report over the years for credit cards, limit increases, leasing, equipment purchases, and a number of other things. Every one of those inquiries appears on my credit history.

Many years ago, I had a pager that I rented from Pacific Bell, and one month I missed a payment on that pager. I thought he turned it in and made my final payment, but because the phone number was wrong, they added to my TRW a debt of $27 that they say went to collections. I stubbed his toe on the $27 in the process of buying his house. It came up again when we got our credit line, it came up when we got our SBA loan, it reared its head again when we got our credit increase. Every single time, he needed to explain why this $27 in collections on a simple pager was on my TRW report. The banks questioned nothing else. (Seven pages worth of TRW and the only thing that really disturbs anybody is the fact that a $27 pager payment was on there for collections!) Obviously, when I first heard about this debt, I immediately sent $27 because that was infinitely cheaper and easier than trying to argue with the company. Nevertheless, for all future lenders, I prepared a half page explanation of why my $27 pager payment is on there.

Use your business plan as a brochure, a tool to coach the loan rep to sell your company internally. Believe it or not, bankers want to know about your market, so include a strong analysis of your market as well as a sensible marketing plan. Back up your sales projections by demonstrating the demand for your product or service and your ability to reach and sell to customers who will ultimately provide the cash to repay your loan.

When you talk to your banker, remember to remain calm and sane. Too much entrepreneurial enthusiasm frightens bankers. This is a matter-of-fact deal, business as usual.

back to Business Plan Workshop index