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By John Day
Remember the book called “Catch 22”? It is now commonplace to
call a “Damned if you do, and damned if you don’t” situation a
“Catch 22”. This is a predicament that many small business
owners have found themselves in. Running short of cash, the
owner goes to the bank to borrow money, only to find that they
don’t qualify for a loan because they don’t have enough money.
This is quite maddening to the business owner who laments, “If
I had enough money, I wouldn’t be asking for the
blankety-blank
loan!”
Seems kind of stupid, but you have to understand what bankers
are up against. Number one, they have to have some assurance
that they are going to be repaid. They have to sell this loan
to the “loan committee” of the bank, and they are not about to
present a package that will make them look foolish.
Furthermore, they have auditors who look very closely to make
sure the loans were issued according to bank policies and
procedures. If a loan officer has too many loans that “go
south”, then his/her track record starts to affect his/her
career.
This is why you find many loan officers who go strictly “by
the
book”. These people refuse to look at any extenuating
circumstances that might indicate that you would be a “good
risk” regardless. Unless you fit into their narrow criteria of
“risk” you might as well forget it.
It is best to find a bank manager or loan officer who has
plenty of self-confidence, is familiar with how small
businesses operate, and is willing to look at the big picture.
They can sense whether a loan applicant is solid or shaky.
This
is the point at which you, the applicant, will want to put
your
best foot forward.
You may find that as long as you have substantial equity in a
home, good credit, and adequate cash flow that you are a tasty
morsel in the mouth of a loan officer. However, if you are
short in any of these areas, you are going to have to overcome
the banker’s natural skepticism.
First impressions are paramount. If you are not organized, you
are dead meat. If you are asking to borrow money, then you
must
possess the skills necessary to pay the money back. These are
skills, such as, the ability to think and plan ahead, and the
discipline required to operate your business in a professional
manner. This means having the know-how to gather information
and organize it in such a way that you can make meaningful and
timely decisions.
Ask any banker and they will tell you of countless business
customers that come in seeking a loan who don’t even know what
a financial statement is. There are many other business
customers who seek loans that do have a financial statement
but
haven’t a clue as to what it means. This does not bode well
for
first impressions.
Compare the individual who comes to the bank, nicely dressed,
well groomed and possesses not only a financial statement that
he/she understands, but has a plan as to how he/she will pay
the loan back. This phenomenon is so rare that a banker will
usually sit up and take notice.
If the reason you are short on cash and need a loan is because
you are a poor manager who is in denial about your failing
business, it will be obvious to the banker. Bankers are
objective. They are not going to throw good money after bad.
However, if you have a healthy business and you want to
finance
a new piece of equipment that will enhance your revenue
earning
capacity then your request will seem reasonable. Perhaps you
need a line-of-credit to shore up your cash flow during less
productive seasons, and you plan to pay back the line during
productive seasons. These are the kind of stories that make
good business sense to a banker.
To back up your story, you will need a Balance Sheet and
Profit
& Loss Statement that reflects the history of your business
activity. Included should be an analysis of your business
trends using some key business ratios. If the numbers look
good, then go for the loan. Remember though, you can’t rely on
the banker to recognize all the positive aspects of your
business, therefore, you should provide a narrative of how
your
business works and why the requested funds for the business
will
help you make more money.
About The Author: John W. Day, MBA is the author of two
courses
in accounting basics: Real Life Accounting for Non-Accountants
(20-hr online) and The HEART of Accounting (4-hr PDF). Visit
his website at www.reallifeaccounting.com to download
for FREE his 3 e-books pertaining to small business accounting
and his monthly newsletter on accounting issues.
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