12/ 09/ 2004
by Jeffrey Moses
Virtually every small-business manual describes what needs to be included in a proposal for a bank loan: the type of business, details the industry, experience of owners, financial history of the company, amount of loan requested, specific usage of funds, projected revenues and profits, collateral, means and timeline of repayment, etc.
While it's true that most small-business loans are approved on a very strict financial basis, there is always an intangible aspect to the loan process—as there is with any business transaction. The following tips can help swing this intangible aspect in your favor.
1. Set realistic goals for the success of your company. Bankers, by nature, are conservative. They like to see proposals that include attainable and realistic financial projections in the loan application. This does not mean that applicants should come to a meeting with a pessimistic outlook. Rather, it means that they should present realistic revenue projections that convince the bank's representatives that funding can be repaid.
2. Understand all the underlying requirements for your company's success. In addition to financial requirements, this includes human resources, coping with competitors, technology requirements, trends in the industry, key-staff issues, employee harmony and other intangibles not often included in a loan application.
3. Know what your business will really cost. If you're applying for a $100,000 loan, will this really be enough to get you over the hump? As the owner, you need to be the expert: How much will your office and equipment leases be? What will your advertising really cost? How much will you have to pay key employees to retain them through start-up? And, above all, describe how the funding will last until you are profitable.
4. Establish a proper relationship between costs for fixed assets and working assets. Fixed assets include furnishings, equipment and other tangible items that depreciate in value. Working assets include product inventory and cash. If you plan to spend a disproportionate amount on fixed assets, your banker will wonder how you're going to be able to afford to grow your business.
5. Talk about the element of timing in your industry. If you can describe how your company is stacking up during the growth phase of your industry, you'll score points with you banker. If the industry as a whole is sluggish or has too many competitors, bankers will wonder how you'll be able to carve a niche for your company.
6. Bankers love stability. Show how you will be able to attract customers and establish steady, ongoing business in your geographic area. Demographics of your area are strong selling points: number of potential customers nearby, ages of customers, annual incomes, average ages of children, locations of nearby competitors, etc.
7. Emphasize sales. Putting out a sign and waiting for customers to show up is too passive these days. Develop an innovative marketing/advertising plan that is as cost-effective as possible. Discuss goals of marketing in terms of profit per dollar spent. These will be projections, of course, but presenting your business as aggressive and marketing-savvy will put you in the best light with bankers.
8. Don't have a dollar in your budget that you don't need and can't explain. That includes costs for employees, equipment and fixed costs such as leases or mortgages. Trim down and point out to your banker how you have done so. The more attention you put on achieving cost effectiveness—without compromising quality of marketing, sales or production—the better you will look.
