So you have worked hard to come up with a business idea and you think you have one that is a perfect fit for you. You have done the market research, know the costs and potential revenue, have the employees you need, and located the perfect place to house your business. Whew! That was a lot of effort. It should be a bit easier from here, right?
Not really. Now you have to make your plan work, and that means you need money. Do you have enough savings to finance your business for the first year? Not many people do. So that means you have to borrow the money...and that means a visit to the bank.
I have seen many entrepreneurs fail at this point because they do not know what the banker needs to see. This includes those business owners that think they know what information the banker needs to see.
Remember that, when all is said and done, the banker is investing in YOU. The banker will put money in your business if he feels that you and your management team can really make the plan a reality. Why? Because if you can do that, you will be able to earn the money needed to repay your business loan, and the banker will only lend to you if he is confident he will get the money back when it is due. Do not plan on getting approved for a loan if you are unable to show the lender how you will be able to repay the loan in a timely manner.
Unfortunately for you, unless you have successfully started and grown a business already (and even if you have), your business will be perceived as a very risky investment simply because it is a start-up business. This is something that you cannot change; it is the way it is. However, if you acknowledge this fact and make your banker aware that you know you are a high risk investment, you will make a better impression. Few things turn off lenders faster than a borrower who appears to have absolutely no perception of reality.
So how do you convince your banker that you and your company are a risk worth taking? The first step is to have a written business plan. This demonstrates that you have carefully thought through your business and you have a plan for making your idea a reality. Keep in mind that the quality of your business plan is not based on how thick it is, but if it contains certain basic elements: a description of your target market, the current problem that your business will solve, how your product or service will solve the problem, the potential revenue and projected costs, and biographies of the management team (who, of course, should have sufficient--and relative--experience in the market you will serve).
Another thing you can do is to offer collateral to secure your loan. You actually may not have any choice about this, but it is good for you to know ahead of time that this will be required. Typically, the bank will use whatever asset you are financing to secure the loan. So if you need money to tide you over until your customers pay you, the bank will have a lien on your accounts receivable. If you need money to buy stock for sale, the bank will take a lien on your inventory.
If you do not have hard assets, which is likely to be the case if you are a service business, the bank will have to settle for a personal guaranty, which is always a requirement on loans to small, privately-owned companies. You can offset the lack of collateral by offering a liquid asset, such as a certificate of deposit, to secure your debt. If you don't have sufficient funds to cash-secure a loan, consider asking a relative or business associate to put up the money on your behalf.
Still another alternative is to have an additional personal guaranty, but from a person or company that is creditworthy.
Keep in mind that the key decision factor is whether or not you will be able to generate sufficient cash flow to pay your expenses, earn a profit, and still have enough cash left over to repay your loan plus accrued interest, on the date the payment is due. It doesn't matter how much collateral you have if you cannot convince the lender that you can do this. And it should make you reconsider if your business idea really is viable.
Above all else, be persistent. Submit your request to multiple lenders. Just because one banker says no, do not assume that all bankers will not have an interest in you.
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Bruce Kaufmann has more than 30 years of experience working with privately-owned companies as a commercial banker and management/financial consultant. His website, Kaufmann's Capital Comments, provides practical advice on how to increase profits and cash by improving internal processes. Read
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