by Bruce Kaufmann
©
2009
http://www.bkaufmann.com/blog
It's
one thing to say that you are going into business for yourself, but it's harder
to actually do it. But you disciplined yourself to do all the hard work necessary
to get your company off the ground, and you have a business plan that you know
you can execute. All you need now is money, and that shouldn't be too hard to
get, right?
Not really. Now it is time to make your plan
a reality, which is going to take more money than you have. 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 so you have to visit your banker.
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.
The quickest way to convince a lender that you are not a good credit risk is to
prove that you have no perception of reality.
You know you
are a good risk, but how do you persuade the banker to take a chance on you? The
most important thing you can do 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. It is common for the bank to secure, or collateralize,
your loan by taking a lien on the asset that you are financing. So the bank will
take a security interest, or lien, on your accounts receivable if you want a loan
to cover expenses until your customers pay you. The bank will take a security
interest in your inventory if you need to borrow money to buy stock.
If
you sell services instead of products, then you will not have hard assets, so
the bank will probably have to be satisfied with a personal guaranty, which is
always required on loans to small businesses. You can offset the lack of collateral
by offering a liquid asset, such as a certificate of deposit, to secure your debt.
If you are like most business owners, you probably do not have enough cash to
collateralize a loan, so try asking friends, relatives or your peers to use their
money to secure your debt.
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.
