How to obtain a business loan
(A Business Plan designed for getting a loan approved)
by Jerry Chautin, SCORE Chapters, Alanta GA & Manasota (Sarasota), FL JKChautin@aol.com
One of the least understood concepts is how to make an effective loan presentation to a lender. A borrower is often told to create a "Business Plan" and to include various required documents. However, this generic approach may result in the loan request being relegated to a stack on the loan officer's desk and perhaps a rejection.
Our objective is to share with you the secrets of selling your proposal to a lender. This is not an academic exercise but rather a professional approach that works. It's similar to the process of gathering information that you would use for an internal management business plan to provide a map to success and profit. In that case, you may want to tweak the format a bit and be more conservative with your projections.
Lenders want to be assured that:
Your business will repay the proposed loan. And that there are sufficient assets (collateral) to pay off the principal in the event the loan goes into default. (For an internal management business plan, you want to assure yourself, partners, stockholders and key managers that you can make a reasonable profit, pay financial obligations and achieve your stated goals.)
It is your job to provide the lender with these two assurances in a clear and concise format. Lenders reject loan requests when they cannot understand the risk or the risk is greater than acceptable to them. An acceptable entrepreneur's risk is often greater than an acceptable lender's risk.
Choosing the Right Lender
Don't "shotgun" your loan request to many lenders. Instead, tailor it to the specific lender most likely to grant your request. Cultivate the relationship before requesting a loan. Who do you know that can introduce you to the bank's president or chief loan officer? Open a bank account before making application for a loan. It is more difficult for a lending institution to say "no" to a customer.
Ask lots of questions before preparing a loan presentation. Do you finance start up companies? Do you make loans under $100,000? Under $50,000? What are your minimum collateral requirements? Do you make equipment or working capital loans? Do you have a very active SBA department? Do not hesitate to switch to a lender that can better accommodate your borrowing needs. Avoid a formal submission if there is not a good chance of being approved because other lenders may find out that you were turned down when they run a credit report.
The Loan Presentation
A winning loan presentation has substantially more sizzle than a business plan designed as a personal planning tool. It may also use a more aggressive interpretation of the proforma operating numbers. Your loan presentation should contain several sections with extensive narrative and exhibits personalized to your situation and your lender's underwriting. Use quality white bond that is easy for the lender to copy and in an attractive type style which is easy to read. The following is a suggested table of contents that may be modified for different situations.
Table of Contents
- Cover Letter
- A. Photographs
- B. Memorandum (Executive Summary)
- C. The Borrower (Description of you and your company)
- D. The Collateral
- E. The Market & Marketing Plan
- F. The Underwriting (Financial soundness of your plan)
- G. Recommendation (Summary)
Motivate the loan officer to pick your presentation out of the many on his or her desk because it seems more interesting and doable than the others. The cover letter, photographs and Memorandum of salient facts are designed to do that.
The cover letter is your first opportunity to sell your loan. Make it great! Lenders have been known to reject loans after reading a poorly constructed cover letter or one that is so impersonal that the presentation looks like it is being sent to every institution in town. Relate the cover letter to specific discussions you previously had with the loan officer and verbal understandings.
The cover letter should be no more than one or two pages long. Explain how the loan will be used. Highlight the strongest aspects. Note the weak points and how you plan to overcome them. If the
collateral is particularly strong, emphasize it in your cover letter. Always recommend approval of the loan as your final thought rather than meekly asking the loan officer to call if there are any questions. If you cannot recommend your loan to the loan officer, don't expect him or her to recommend it to the loan committee.
If your presentation is for venture capital, you'll need to talk about an exit plan. How and when will your investors get paid back? Do you plan to go public in a few years? Or will you refinance them out of their investment? You should also discuss return on investment (ROI). How much will they get for taking the risk? And when will they get it? You can eliminate the cover letter entirely if your business plan is an internal management tool for your eyes only. However, many entrepreneurs want to share their business plan with key managers and advisors so that everyone has the same vision. In this case, a cover letter is a good idea also.
Use them! An interesting 5" X 7" on the cover of your presentation can get your proposal read first. Put lots of interesting photos inside. Get the most attractive shots you can and fully explain them. Use a professional if your own photographic skills are lacking. If real estate is the collateral, show the subject, comparables and the neighborhood. If a real estate appraisal is required, tell the appraiser to take attractive photographs too. They are notorious for taking photos showing overflowing garbage bins and water accumulations on the pavement. Negotiate with the appraiser on this issue. Show your officers, happy employees, smiling faces, machinery and equipment (if attractive). This may be the only opportunity for the loan committee to see these subjective exhibits that greatly help in selling your deal.
Captions under each photograph should tell the story you want the lender to know. For example: "Our offices will be located on this well-traveled street. The landlord has given us sign privileges that assures us walk-in business and helps us to lower our advertising cost." The caption under a photo of your store shows your business and marketing skills and gives the lender confidence that you'll succeed. Another example, "Joe Smith fine-tuning our new computer system. Joe majored in Computer Science at the University of Georgia." This caption under a photo of your equipment and an employee may be a solution to your lack of computer training or show you hire quality people.
Clip art and graphs used sparingly are good too. Cartoons and interesting artwork makes the lender's underwriting process more personal and enjoyable. Marketing yourself and your company well "proves" that you have the ability to market your product or service to your customers. You don't want to over do it but think outside of the box.
Memorandum of Salient Facts
The memorandum is also called the "Executive Summary". I call it the "memorandum" because lenders sometimes call it that when they pass it around to their loan committee. Limit it to one or two pages. It should contain the most important facts. Ask if he has an example he's willing to share with you. Ideally, you can use his format with your words. Your mission is to get the loan officer and you in a team effort in presenting your proposal to committee. This is an honest, full disclosure negotiation. You both have the same objective — to approve a good loan. Trust is the key.
Name and describe the legal entity. Explain why you chose that type of ownership. Describe your business and it's owners. Your objective is to sell to the lender the previous success of the company, its principals and officers. Enclose a biography of all the principals and key employees. Don't make them look like job resumes. Dates are not as important as the number of years of related experience you have. Awards and industry recognition of your accomplishments should be noted. Avoid fluff that doesn't relate to the skills needed to make your business successful.
Do a detailed sources and uses of loan funds. It should clearly describe how the requested loan will be used. List other sources of funds, your own personal contribution and how it's to be used. A simplified example is below.
Sources & Uses of FundsSource: www.tenonline.org