I am a child of the late 70’s, which means that I would wake up on Saturday morning and watch classic cartoons like He-Man, Transformers, and M.A.S.K. (1,000,000 bonus points to anyone if they can tell me the name of the M.A.S.K. leader). Saturday morning also meant eating super sugary cereal like Lucky Charms. The 1980 marketing gurus knew exactly when to run Lucky Charms commercials and I am sure that my parents weren’t the only ones who were woken up by 10-year old boys chasing each other saying “You’ll never get me Lucky Charms”.
For some entrepreneurs, it feels like they are chasing after their banker trying to get a loan, and just about the time that they catch up, the banker looks back and says “You’ll never get me Loan Dollars”. As someone that talks all day with entrepreneurs about good debt, I want to give you a peak behind the curtain with 4 things you need to know so that you will get approved for any business loan.
1. Know your bank(er). Entrepreneurs don’t make any money talking to their banker, but you should invest in your company well before you have a loan need. Meaning, you should have your banker visit your office so that they can see your operations and understand clearly what your vision and future need may be. Remember, this is before you have any specific loan need. While you are meeting, you can ask if their bank likes your type of business and does it offer the types of loan that you may need. Be sure to ask about the typical structures (down payment, amortization, fixed vs. variable rate, collateral, guaranty, fees, etc.) of loans that would help your FUTURE need. Ask them to explain their loan process, specifically who makes the decision, how long does it take to get an answer, what is needed for the analysis (the bank nerd term is “underwriting”), how long does it take to close, what are some non-bank fees. Ask for similar clients (they may be your competition but that is ok) that you can go and talk to and ask them about how the loan process was and what to expect, or what to watch out for.
2. Know your numbers. The hard analysis of the bank comes down to 3 numbers. Click on the links below to explore each in greater detail, understand how calculate the number for your business, and receive general guidelines on what result banks are looking for.
a. Debt Service Coverage. The ratio that looks at how much free cash does your company generates compared to the existing and future loan payments (debt service).
b. Cash on hand (after you make any down payments). Cash is king, the more you have the more flexibility your company has to overcome unknowns in the future.
c. Leverage. What percentage of your assets are on your balance sheet, only because you were able to borrow in order to acquire them? For example, a balance sheet that has equipment worth $1,500,000 with has no debt is a lot stronger than the same balance sheet with a $1,499,000 equipment loan. Leverage is another indicator of financial flexibility. If you do not have to pay anyone anything (i.e. you have very low leverage) than you are nimble and can adapt to uncertainty.
To be sure, there are other factors that may be important for your industry and loan request, but these are critical for every loan. If you are going to be judged by the bank, you should at least understand how they analyze you. Knowing this will allow you to have a deeper conversation with your banker about the numbers that may show more risk than what the bank likes; and what you can do to off-set that risk.
3. Know your risks. It has been said that with no risk, there is no reward – but you had better know the risk. By their very nature, entrepreneurs are risk takers. They see opportunity where everyone else see danger. But your bank is not an equity partner. They are going to lend you money, and the VERY best that they can hope for is to get that money paid back along with a little bit of interest (because you are going to beat them up over the rate) and any fees that they charge. As a result, banks are naturally less risk takers than entrepreneurs. They will always be looking for a way to get their money back in the event that things don’t work out (why else would they go through all the effort and cost to add collateral to loans). Therefore, if you want to get approved for any business loan, you have to look at the deal from the bank’s perspective. What are the risks that could cause the bank not to get paid back, and what can be done to reduce those risks?
4. Know your timing. Have you ever heard the saying “your failure to plan, does not make this my emergency”? You need to know how long it takes your banker to deliver on a loan promise. Of course, your banker should be willing to work late and push every request through the process as quickly as possible, but I would recommend saving yourself the stress of seeing how fast they can operate. It always pains me to hear entrepreneurs call their banker at noon on Thursday, saying that they need to have an emergency payroll loan by 8:00am Friday. Some banks can make this happen; some cannot. But the entrepreneur should have known earlier in advance that this need was coming and not waited so late to ask for assistance.
I firmly believe that entrepreneurs do not need to learn banking; but if there is a need to borrow money from a bank, then you need to learn how you are evaluated so that you can negotiate from a position of strength. I cannot wait until I have a client tell me “Greg, I have read all your articles and I have done what you said. I know I am a low risk to the bank – so lower that interest rate!”.
Finally, entrepreneurs need to conduct an honest audit to determine if debt is needed. Not all debt is good debt, and just because a bank tells you “yes” does it mean you should go forward with the loan. Debt is like fire, it can cook your steak or it can burn your house down; you have to know how to use it wisely. But if the debt you are after is good debt, then follow these steps and you will have the bankers chasing after you, like the kids chasing Lucky the Leprechaun.
Being an entrepreneur is one of the most difficult and demanding things you can do. The good news is that entrepreneurship today is a team sport. Hit the connect button on LinkedIn or Facebook NOW and together we will work towards hitting your 10-year target. Along the way we will increase your profit, strengthen your leadership skills and define your strategic vision. This will lead to confidence in your path, freedom to dream up bigger targets and a strategic banking relationship. When we connect, tell me about your best (or worst) loan experience.
Greg Martin is an entrepreneur’s insider to the banking industry and passionately believes that every person was uniquely designed for a higher purpose and calling. Greg guides entrepreneurs in defining and achieving their purpose and calling. His deepest passion is living life with his wife and their wonderful son.
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College Station, Texas
(910) 257-8286