Prior to the Pitch: How to Secure a Bank Loan
Posted Apr 28, 2011, Published 2002-10-01
It's the bottom of the ninth, tie score, bases loaded and it's your turn at bat. You approach the plate, take your stance, watch the ball come in, swing . . . and miss! Three swings later, you walk back to the dugout wishing you had put in more time at batting practice.
Preparation is key in any sport and the same holds true when seeking growth capital for your laboratory. Whether you'd like to grow your laboratory with a new high-end department or cutting-edge system, your efforts to secure a bank loan should begin well before you walk in and make your pitch.
"There are certain things you need to do to set the table for your bank loan," says Terri Fodor, co-owner of 15-employee Secret Aesthetics in Cuyahoga Falls, Ohio, who secured nearly $1 million in financing to build and furnish a new 8,700-square-foot facility. "We started preparing for our loan about three years earlier so we'd have a running start. We showed the bank that we were a strong business and that we could handle a loan."
There are no hard-and-fast rules for how long it takes a loan to be approved. Since each business and the loan it's seeking is different, the timeline depends on what issues--if any--arise during the underwriting process, like credit concerns or environmental issues for a new construction. Experts say that, in general, you should allow a minimum of six to eight weeks, but warn that for some businesses the process can take much longer--even up to a year--so plan accordingly.
Establish a banking relationship
Your first step should be to find a bank that suits your needs. For example, if you need a $50,000 loan, instead of working with a bank that normally works with large corporations, you may want to target a community bank that actively seeks businesses needing smaller loans (under $500,000). If you need a referral, ask your lawyer or accountant or contact a local small business development center, like the Small Business Administration (SBA). (For SBA contact information, see the Toolbox below)
Once you've identified a match, establish a relationship with the bank. This can be as simple as doing all of your personal banking with the bank, as did Becky Vasquez, co-owner of 70-employee Becden Dental Laboratory in Draper, Utah. Through her personal banking activity, she got to know the branch manager who personally introduced her to the loan officer when she was ready to ask for the $90,000 she needed to start up a laboratory with her husband, Dennis.
Terri Fodor took it one step further. About three years before she approached the bank for her "big" loan, she started taking out "mini loans" for company cars and equipment and established a credit line. She also made an effort to pay off the debts early.
Get your house in order
To ensure your laboratory isn't a financial risk, your bank will scrutinize your business and look for the "four Cs"—character, collateral, cash flow and coverage—so get your house in order. "To sell yourself and your company to the bank, you have to be very professional and present it with very organized information," says Vasquez.
Most importantly, your bank will want to see a variety of financial reports, so it's essential to establish thorough financial reporting practices now. Though requirements vary, here's a list of what documentation you might have to present:
Amount of equity the owner(s) has in the business;
Projections of income, expenses and cash flow;
Financial statements, including a balance sheet (which shows your company's assets and liabilities), profit and loss statement (which shows the earnings and expenses of your company over a specific period, usually one year) and cash-flow statement.
Three to four years of tax returns;
Schedule of term debts;
Aging of accounts receivable and payable.
Presenting the reports isn't enough: you should also be able to interpret the information. Not only will you be able to speak more knowledgeably and accurately about your laboratory's financial picture, you'll be able to spot potential problems and implement solutions—or identify growth trends—before going to the bank. For example, by reading your monthly income statement—which summarizes your income and expenses and determines your profit or loss for a particular period—you discover that profits for all-ceramic work are steadily increasing. You can highlight this as a market for potential growth to your loan officer.
Since banks also seek owners with management expertise and a demonstrated commitment to the enterprise, your business plan is equally important. (See How to write a business plan or click here to view on-line samples at www.bplans.com). They may also ask for other documentation, including the purpose of the loan, history of the business, lease details or blueprints.
To get her documentation organized, Vasquez worked with a member of the Service Corps of Retired Executives, or SCORE, a resource of the SBA. "He coached us on how to build a business plan, loaned us books and told us how to put financial projections together," says Vasquez. [(For SCORE contact information, see the Toolbox below.)]
Some laboratory owners go above and beyond what's requested to further illustrate their commitments to the venture. Vasquez, for example, also provided the bank with the marketing materials she had begun to develop as well as a market profile and competition analysis.
Creditors will also put your credit report under a microscope and look for red flags such as chronically late payments. Also, if you have several unused credit cards, the bank may wonder if you're keeping credit cards available so you can use them once you max out others.
So you'll be prepared for questions from the loan officer, pull a copy of your credit report, especially if you have credit concerns or had problems in the past. If you've ever filed for bankruptcy&mdashl;information stays on your report for seven years—the lender may balk. If you've paid your debts and can explain your situation—for example, why you filed and what you've done to resolve the problem—you may not be automatically declined. Better yet, request that a statement explaining the circumstances be attached to your credit report. Whenever your report is pulled, the statement goes with it. [(To contact the three major credit reporting bureaus, see the Toolbox below.)]
Get a powerful backer
If, after all of your preparation, you're concerned that you might not qualify for a loan, ask the bank about an SBA Guaranty. This type of loan ensures the bank that if your laboratory defaults on the loan, the SBA will reimburse the bank for a portion of its loss.
While there are certified SBA lenders—banks that regularly work with the SBA on its loan programs—you don't have to work with one to get an SBA-guaranteed loan. However, certified lenders may be more familiar with specific SBA programs for which you may be eligible as well as with the process involved. For example, the "LowDoc" program is for loans up to $250,000 and usually offers a speedy turnaround time and a simple, one-page application. The 7(a) program, on the other hand, is for larger amounts.
If the bank feels you are a candidate for an SBA-guaranteed loan and you meet certain SBA requirements, it will provide you with an SBA loan package and then send this information to the SBA along with your loan application. The turnaround time depends on the type and amount of the loan you are requesting.
When trying to close the deal with your loan officer, it may be a good idea to bring key management with you to demonstrate that you have a dedicated team in place. Better yet, invite him to your laboratory to meet personnel and view your operation. If the bank is responsive, don't forget to negotiate the best possible terms for your laboratory. While interest rates are usually fixed, you may be able to haggle over your payment schedule or ask the bank to delay payment on the principal. On the flip side, if your loan application isn't approved, get specific reasons for why it was denied, work to resolve those issues and then include a report that addresses the concerns with your next loan application. In the meantime, work to establish a good credit history with another third-party lender (see Alternative financing options). It may help make you more attractive to a bank the second time around.
Here are some useful resources and contacts that can help as you prepare for a bank loan:
- Active Capital: Visit http://www.activecapital.org
- Credit bureaus: There are three major credit reporting bureaus from which you can buy your credit report:
- Equifax: Call 800-685-1111 or visit http://www.equifax.com
- Experian: Call 888-397-3742 or visit http://www.experian.com
- Trans Union Corp.: Call 877-322-8228 or visit http://www.transunion.com
You can also obtain your actual FICO® credit score—a number between a low of 300 and a high of 850 that gives creditors a 'snapshot' of your credit risk at a particular point in time. For a fee, you can access this score through any of the credit bureaus or at http://www.myfico.com
- Factors: For details, visit http://www.cfa.com and click on 'What is asset-based lending?'. To search for a factor, visit http://www.factoring.org
- SBA (Small Business Administration): Call 800-UASK-SBA (827-5722) or visit http://www.sba.gov
- SBICs: For a free publication, Directory of Operating SBICs, visit http://www.sba.gov/inv and click on 'Operating SBICs'. The National Association of Small Business Investment Companies (NASBIC) also sells contact lists; call 202-628-5055 or visit http://www.nasbic.org
- SCORE (Service Corps of Retired Executives): There are 389 chapters located across the U.S. and in Puerto Rico; e-mail counseling is also available. Call 800-634-0245 or visit http://www.score.org
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