The ‘Six Ps’ of Small Business Borrowing in Tough Credit Markets

This post by Bill Sims

Posted in Business Conditions, Business Start-Up, Financing

Banker Checking Figures

Despite the current financial upheaval both in Nevada and throughout the nation, entrepreneurs and small business owners still need access to capital to start or expand a business.  But, navigating the path from deciding a loan is needed to having the funds in the business banking account has recently become much tougher.

Not only have most all lenders tightened their underwriting guidelines in response to their own challenges in getting access to capital, many lenders are now only looking for outstanding business investment opportunities (that’s what a small business loan actually is).  The challenge for potential borrowers is to position themselves and their business (or proposed business) at the top of the applicant pile.

Here are six Ps that will help ensure a loan applicant is well-positioned for borrowing success:

Perfect the Business Plan

Enough cannot be said about the value of a concise, yet thorough and well-written business plan.  The many business plan template programs can help in this regard, but giving a business plan the personal (and localized) touch shouldn’t be ignored.  The business plan should reflect YOUR plan for YOUR business, and state the case for anticipated business success in a compelling and straightforward manner.

Applicants should put themselves in the banker’s shoes as they perfect their business plan.  What questions would you expect the plan to answer if it was your money being loaned out?  Running a draft business plan past a trusted friend with some business background is advisable to cross check the vision of a business dream against the reality of the current business environment.  Having historical demographic and economic data is nice…but including current, local data and explaining how the company plans to address current market conditions provides the banker a firm basis for a business plan, and not just an idea plan.

Bankers want to be reassured of two major things.  One, that the business plan can show how the company can generate enough cash flow to pay back the loan, and two, that the borrower has a contingency plan to repay the loan if the business falters.  Demonstrating both is essential in this current lending environment.

Pull Personal Financials Together

Those applicants who are just getting started in business should be prepared to show the banker several documents related to personal finances.  These documents include:

•    2-3 years personal tax returns
•    Personal Financial Statement (all personal assets, liabilities and cash flows)
•    Banking statements for at least the most recent 12-month period
•    Any contracts or agreements that prove the basis for existing passive income (rents, royalties, etc)

For those applicants who are already in business, add any business tax returns from the last three years of operations.  Keep in mind that when asking a bank to loan large sums of money for a business, none of an applicant’s financial history should be considered ‘confidential.’  Such a policy may seem intrusive and bothersome, but bankers are only trying to make sure the borrower is worth the risk the bank is assuming by making the loan.

Preview Your Credit History

Knowing what’s on a personal credit report before applying for a small business loan is a must for two reasons.  First, it gives the borrower a chance to craft explanations (careful…not lies) for any entries that are negative.  Also, it gives the borrower a chance to assess their current credit status and decide what steps they can and should take to improve their credit standing.

It makes little sense to approach a lender with an otherwise excellent loan proposal package if the borrower’s credit history is riddled with a constant stream of recent negative entries.  Being able to explain bad credit entries from several years ago is different from addressing poor credit entries within the last year.

Borrowers with a recent history of poor credit would be best served by taking proactive steps to correct the situation before approaching a lender for a small business loan, especially given the current tight credit market.

Poll Family and Friends for Equity Injection

Lenders are now requiring even higher levels of personal equity injection into a business than they were a year or two ago.  This is a direct reflection of the current economic situation we are all experiencing.  Since most borrowers cannot personally come up with a 20-25% cash injection (or more, depending on the lender), polling family and friends to guage their ability to commit the needed equity funds is a crucial preparatory step before approaching a lender.

Related to equity injection is available collateral for the loan being sought.  In many cases, lenders will want to place a lien on personal assets, including homes, especially if the proposed business assets do not adequately cover the bank for potential losses in case of a loan default. Deciding what is personally acceptable along these lines is recommended before approaching a lender to avoid any ‘surprises’ to the borrower, family or friends.

Prepare the Loan Package and Polish the Presentation

Making a good impression on a lender is vitally important in the current lending environment.  Recommendations in this regard include making multiple copies of the formal loan package with Business Plan, Projected Financials (plus actual financials for existing businesses), Uses of Funds Statement (how the business will use the loan proceeds), Personal Financials, Resumes and other supporting documents (i.e. articles of incorporation, business licenses, permits, etc.).  A professional-looking package generates perceived credibility for the business concept, and appropriately preps the banker for a verbal presentation of the business loan proposal.

Having a polished five minute oral presentation on the highlights of the business plan demonstrates to the banker that the applicant has a command of the major facets of the plan, including key success factors and potential challenges.  Create a compelling presentation and then practice, practice, practice, especially in front of an audience!  The final product should flow and sound like an extension of the applicant’s normal conversational style.

The banker will ask a variety of questions.  Field each one thoughtfully, and truthfully.  Promising to get back to the banker within 24 hours with answers that are not available during the meeting is a best practice.  Don’t bluff it.  Bankers are like mothers…they know when the truth is not being told.  But, they will give the applicant the leeway to get back to them, since they understand no one can have all the answers at their fingertips.  The final touches?  Dress for success to engender and show respect, and arrive at least five minutes before the scheduled appointment time.

Promote Yourself and the Business!

The best cheerleader for a business is its current owner.  Without engaging in theatrics, business loan applicants should sound and act passionate about their business proposal.  Touting one’s experience and successes in prior business environments is especially useful.  Bankers loan money to companies largely based on their perception of the skills, knowledge and abilities (SKAs) of the people who will run the business on a day-to-day basis.  And that includes managerial staff below the owner.  Being prepared to effectively position the experience and previous successes of the owner(s) and management staff is essential, including having current resumes in the loan package.

Prepare to Meet with Multiple Lenders

Presenting a business loan proposal to multiple lenders isn’t one of the 6 Ps, but it’s a reality of small business lending.  Each bank will have their own preferences for certain industries they feel comfortable with.  It pays to start with a bank that’s already being used for personal banking.  Asking for referrals to other banks that may be better suited to the applicant’s loan needs is the next logical step if the current banker is not a good match.  A list of all current SBA-participating lenders serving Nevada and their historical SBA loan production is available through this SBA Nevada District web site link.

Summary – Preparation is the Key

Successfully obtaining a small business loan is very challenging in the current economic environment.  Following these steps will better position any small business loan applicant to ‘put their best foot forward’ when it comes time to meet with a lender. During this time of tight credit and lending, taking the time now to thoroughly prepare a loan proposal package and presentation will likely pay off when credit markets begin to recover, and lenders seek to bolster their loan portfolios through small business lending.  Remember: Proper Prior Preparation Prevents Poor Performance.

This post provided by the U.S. Small Business Administration – Nevada  District Office

One Response to “The ‘Six Ps’ of Small Business Borrowing in Tough Credit Markets”

  1. On October 23rd, 2008 at 8:08 pm Steve Coleman Said:

    Glad to see that access to a business loan to start or expand a business is made clear. Borrowing to make payroll or buy a new company auto has been the downfall of many small businesses. If the loan can’t turn a profit it should not be made.

    A well researched and laid out Business Plan ,clearly showing how any loan will generate profits and be repaid with interest, will find lenders even in the depths of depression.

    Steve Coleman

    http://www.businessmanagementbasics.com

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