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Requesting a loan, improve your chances!
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What is your track record in getting a loan approved? Are you satisfied? If not, maybe it is time to review your process.
Don't measure your loan package in pages, but in readability. Write simply and practically. Use simple bullet points and short paragraphs. Present the loan request as if you were making the loan to a third party you did not know. What questions would you ask and what requirements would you place as a lender?
Consider the fact that by helping the potential lender’s do their job the better your chances for approval. Present your information in their language! The more you understand their constraints and limitations the more you separate yourself from the other applicants. While the loan approval may not be the terms and conditions your were looking for, how you present your business and loan package will determine how far the loan officer will go to bat for you. That is the value of the process.
Explain the fundamentals of your business in terms a high school student would understand. You are not there to impress the lender with your education or language skills. You are there to get a loan! Your request will be reviewed for the quality of the information provided, readability, (how hard the lender has to work to understand the request and supporting documentation) ideas and your thought process. If you were a job applicant consider it a five minute interview.
So what are the essentials of a good loan package?
Start by reviewing what information you intend to provide the lender. If necessary involve your professional advisory support Board, attorney, accountant, banker, insurance agent, consultants, or mentor’s as the case may be. See Three essential assets every business needs dated of April 18, 2009.
Fine tune your request by rethinking your ideas and assumptions to make an effective presentation. Remember you know your business inside and out, the lender does not. The loan process is to help the lender understand your business so they can say yes to the request. Hopefully the lender is on your team as an advisor.
Prepare a short one paragraph summary of your request. State clearly and precisely how much you are asking for, what will the funds be used for and how you plan to repay the loan?
Next provide the lender information on who will be responsible for the loan with complete contact information. What is the legal name of the entity? If registered with the state, such as a corporation, provide the date of incorporation and only the active officers employed in the day-to-day affairs. If the business has more than one location, provide the contact information for the main office. Follow this up with information on where the equipment will be located if not at the main office. This will be important for the lender to file a UUC (lien) with the proper recording authority.
Follow up with a short paragraph on the purpose of the loan from the strategic or big picture impact on the business. Specifically how the acquired asset benefits and impacts such things as staffing, pricing, operations, and sales. You'll need to have a clearly focused vision of how your company is going to make money as a result of the asset acquired. You'll need to stress your ability to generate sufficient cash flow to repay the loan.
After providing the strategic or big picture impact, provide one or two pages of supporting analysis concisely and to the point as it relates to the asset to be acquired. Focus very carefully on the executive summary, the management, marketing and financial aspects. How the loan will make your business more profitable, thereby ensuring repayment.
As appropriate: In short paragraphs, define your niche, your unique corner of the market described your products and services as you see them. Then describe them from your customers’ point of view. Describe your key management team. Identify your customer’s demographics, their characteristics, and their geographic locations. Analyze each major competitor. In a few words, state how you think they stack up.
Next, provide a one page summary of the impact (as the case may be for the acquired assets) on your sales forecast and cash flow, by month for the first year and quarterly for the second year. (These financials can be prepared in Excel for easy corrections and what if’s.) Follow this up with a summary of the last two year ends and most recent quarter to date with a comparison of last year’s quarter to date. Summary balance sheets should be incorporated for the same sales periods. Summarize these results makes the lender’s job easier and shows a degree of financial understanding. The actual tax returns should be included as an appendix at the end.
One of the most overlooked and missing pieces of information in a loan request is how you will measure the performance of the asset acquired and what are the results? So … Explain it! Emphasize and describe the kind of Key performance indicators (KPI), sales, costs of sales, expenses, leads generation, whatever--that will be used to measure the performance of the acquired asset. Strive for visibility of performance on the asset acquired. As attributed to Peter Drucker, “What gets measured gets done”
One area that is commonly overlooked by the presenter and generally asked for by the lender is concentration information. Lenders will typically ask for receivables and payables information. Again make their life easier. When providing the most recent year end and your current quarter interim aging for receivables and payables include the percentage or concentration by customer and vendor. For any large balances 60 days or more past due, provide the explanation. Do not require the lender to ask for it.
Follow this up with a schedule of your debt and current maturities. This will include all leases. As a side note, lenders consider this debt and incorporate this in their approval process. While lease verses own is a separate topic, be aware of all the leasing sales hype about leasing freeing up cash flow, off balance sheet, financing, less cash down, and not affecting your bank lines of credit. Leasing may impact your ability to obtain future loans. That is not to say leasing is not an alternative, it is a consideration that requires greater analysis and further comments.
Some of the most common mistakes to avoid include:
Not knowing your audience. Market your loan request to the abilities and strengths of the lender. If your loan request has merits on the cash flow with little hard assets to back the loan request consider cash flow lenders not asset based lenders. Do your research and make sure the lenders have the expertise for the type of loan you are requesting.
Including a long list of references and advisors who have well-known names but provided limited help and support or only have limited exposure with your business diminishes your credibility. Remember if you give a reference, bankers will check up. More important if your reference is a part of their network and the truth comes do not expect a loan approval.
Providing too much information or the wrong information can sabotage your request. Focus on the reason for acquiring the asset and the results that will be achieved. Don't include what doesn't help you and your management team.
In today’s economy lenders have tightened their credit standards. There is no guaranteed way to submit a loan request and have it approved, but changing and improving your presentation can make a difference. That difference is up to you!
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