When the Bank Says "no"
Your company is growing, entering new markets, developing
and supporting new products. Cash is tight. As the owner, you
have to face a truth you have been avoiding: your company needs
money. Where do you go to find it?
While there are numerous financing choices for small and
medium sized owner-managed businesses ranging from asset based
financing to factoring most company owners will visit a local
bank first.
For most business people, a visit with their banker is in
the same category as a trip to the dentist; necessary, but
not something you look forward to. Even though you have exactly
the kind of company the bank advertises it supports a successful,
locally owned small business you are wary and unsure of the
bank's commitment to your company. Banks still possess a foreboding
mystique that can intimidate even the most experienced business
person.
Your meeting with Mr. or Ms. Banker seems to go well. Three
days later you get a call from the bank. The loan committee
has denied your request. What do you do? Turn immediately to
another source of funds? Shrug it off and figure that you will
find a way to grow without outside money? No.
Go back to a bank a different bank this time and go prepared.
You can try your original bank again, but first impressions
are hard to overcome (you never get a second chance to make
a first impression). The loan committee will be placed in the
awkward position of overturning their initial decision. Better
to make a fresh start unless you have compelling reasons to
stay with your original bank. By turning you down, the bank
has made a pretty strong statement. Listen to it.
They don't particularly want your business.
Bankers turn down thousands of company owner every business
day. Unfortunately, it's a case of what can best be described
as "professional" lender meets "amateur borrower.
You probably see a banker a few times a year, if that; your
banker meets with potential borrowers every day of his or her
career. That does not exactly make for a level playing field.
Your meeting is a mismatch from the start.
There are specific steps you can take to dramatically increase
your chances for success in dealing with banks and other lenders.
This may sound like an oxymoron, but you have to get your banker "excited" about
your company (an excited banker?).
The excited banker
Only if he or she is truly excited and committed to your
loan proposal can he or she sell it to the loan committee.
And it is a rare bank today that doesn't require committee
approval on a business loan. Now, excitement for bankers is
not your usual jumping-up-and-down-for-joy excitement. It's
something much more subtle.
Bankers are always on the lookout for solid companies to
which they can loan money. That's their job. Bankers get excited
about companies that stand out from the ordinary. You have
to sell your banker on you and your company. Look at selling
the bank as similar to the process used in selling your products.
You don't expect potential customers to automatically recognize
the benefits of your products without some education. Treat
your banker the same way. Don't expect the banker to automatically
see the gold hidden in the vision of your company's future.
Most loan proposals that come across bankers' desks have
a uniform similarity that reeks of lack of preparation and
shouts "Reject me, reject me! Reject me for lack of documented
financial information. Reject me for lack of a specific plan
to pay you back. Reject me for not demonstrating how use of
the bank's money can actually help my business earn additional
profit."
The language they speak
The biggest reason most otherwise successful business people
fail in their dealings with banks is that they are just not
speaking in a language the banks understand. Lenders speak
a language that is foreign to the average business owner. This
language is based on numbers and it uses these numbers to tell
a story.
You can have the greatest story in the world, but if you
are telling it to me in German and I speak only English, I
am just not going to get it, much less be excited about it.
Talk to the banker in the language they understand and, most
importantly, recognizes and respects.
When you put your financial information together the first
time, what kind of story did it tell? You or your accountant
probably rounded up the companies past few years' annual financial
statements along with an interim statement and submitted these
to the bank. Unless you are in an exceptionally strong financial
position (and if you are, you most likely would not be applying
for the loan), the information you gave the bank is probably
not enough to tip the scales in your favor as far as the loan
committee is concerned.
Have you ever thought of why you were never given a second
chance to meet with the loan committee? It's not because they
are too busy. It's because the bank doesn't want non-financial
issues like people and personalities to cloud anybody's judgment.
Your financial information has to stand alone. You are judged
on your financial performance as you have given it to the bank.
Period.
Two things to make your application stronger
You can legitimately make the story you tell the bank substantially
stronger by doing two things. The first is "recasting" your
previous years' earnings. The second is including pro formas
in your loan submittal package.
Recasting earnings is simply redoing your financial statements
to show what your business could have earned its maximum earning
power in any given year. As a private business you try to minimize
taxes. Taxes are based on income, so it's only natural that
you tried to keep your income reasonably low. Great. But low
income is not exactly what your lender wants to see.
Adjust your income statement to show what your profit could
have been if the company hadn't paid for your car and insurance.
Adjust for the money you spent to sponsor your son's little
league team. Adjust for the money you contributed to your spouse's
favorite charity that benefited a good cause and helped
maintain harmony at home. Adjust for the bonuses you paid to
your key managers that were not required to be paid. In other
words, adjust for everything that was not an absolutely necessary
business expense. Look for expenses that could be eliminated,
even though you might not choose to eliminate them, and which
still allow you to successfully run your company.
In particular, look very carefully at your own salary and
the salary of any relatives on your payroll. As the owner you
can take as much cash as you want out of the company. But if
what you are taking in salary and bonuses exceeds normal standards
foe your industry, your company is showing less profit than
it is actually making. This may make sense from a personal
standpoint but, again, this is not what you want to show your
banker.
No matter what bankers may sat, the first thing bankers look
at is the annual profit shown on your financial statements.
This is the benchmark of your success in their mind. Nice profit
equals smart business person; low profit equals dumb business
person. No amount of explaining can undo the damage a poor
profit figure does to your image as a successful company builder.
Get your profit as high as you can before you meet with the
bank.
For example, you are taking home a salary of $125,000 when
$75,000 is more in line with what other owner of similar size
companies in your industry are making. More power to you. Buy
if you add this $50,000 of "excess" compensation
back into profits, your bottom line is going to look much better.
If all this sounds suspiciously keeping two sets of books
relax; it's perfectly legal since all your income is being
reported. You are just showing what happens if you move income
and expenses around on paper. As for the work involved, all
that is usually required is a few adjustments on the expense
side of the ledger.
Show them why you want the money
After you have recast your earnings to put your historical
financials in the best possible light, it's time to look to
the future. What are you giving your banker that shows them
what is going to happen to the company's finances over the
next three to five years? What are you giving the bank to show
how you are going to use their money other than vague references
to "the need for working capital?" Probably nothing
if you are like the majority of business owners.
This is a big mistake. Bankers want to know specifically
what you are going to do with additional funds. Here you have
another opportunity to set yourself apart from the competition
(and you are literally competing with other borrowers
for the bank's funds) by showing the bank exactly how you are
going to use their money. You are going to use their money
to make more money. All bankers are capitalists or they would
not be in banking. They want to see their capital grow and
make more capital. Show the bank why your use of their money
makes good business sense.
In order to do this, you need to develop a pro forma that
projects your financial statements out over the next three
to five years, depending on the term of the loan you are requesting.
Lenders want to see a documented, believable future that puts
their money to good use and shows them how they are going to
be paid back. Show the banker how you are going to use their
money to increase profits by opening up new global markets
where there is a demand for your product. Whatever it is be
specific.
Bankers like to loan money when they are convinced that your
use of their cash will generate more cash for you. Unless you
can demonstrate that these borrowed funds will ultimately sow
the seeds of additional funds in the form of company profit,
don't bother your banker with a loan request. He or she will
want to save the bank's money for their customers who can put
it to best use. And best use is always money making more money.
Pro formas use income, balance, and cash flow statements
to demonstrate your future financial performance. By tying
all these numbers together, you can build a future that shows
the bank that you are in command of your business.
The bank probably has no doubt about your skill in making
your particular product or providing your particular service.
What they are concerned about is your financial skills. All
that they know about you in this area of your life is what
you show them in your loan application. By presenting a professional
package that answers their questions before they have a chance
to ask them, you clearly demonstrate that you know what you
are doing. You are speaking their language. You have told your
story in the best possible way. If a bank still refuses to
bite, only then should you consider other sources of funding.
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