Paul's Tips

If you’ve outfitted your business about as far as you can on funds scraped together from checking-account float, birthday money, and your MasterCard, it might be time for a loan.

Maybe you’ve already asked your banker how to get a loan, and he or she has suggested that the whole process would be much easier if you put up your house as collateral, call it a home-equity loan, and forget about getting past the killer business-loan committee.

It’s true that business loans, especially for small, home-based businesses, are not easy to come by in this credit-crunch environment. But they’re worth the trouble: The sooner you start building a business credit history, the easier your borrowing will be down the road if and when you need big bucks for a major expansion. For that reason, even a small, more obtainable loan is worth pursuing.

When you start the loan-application process, your banker will probably give you the standard, but valuable, information about how to prepare a business plan. Follow those directions, but realize that it’s the inside tips your banker won’t mention that can win you the edge.

GET A LOAN

Here is a baker’s dozen of banker’s secrets that can get you capital.

1. Bankers like their buddies. This doesn’t mean insider trading–it just means that they like working with people they know. If you think that in six months to a year you will be asking for a business loan, start cultivating a relationship with the loan officer now. Find out who he or she is, introduce yourself and your business, say you will be asking for a loan in about six months, and ask about the procedure. Find out who is on the loan committee, how often it meets, what it looks for, and the like. Invite your friendly banker to come see your offices, or take samples of your work to the bank.

2. There is no such thing as a fill-in-the-blanks business-loan application. The form of the presentation depend on the applicant, but, the more details and data you can provide, the better off you will be. At a minimum, says Steve Cranfill, a former Seattle loan officer turned consultant, small businesses should provide up-to-date tax returns, monthly cash budgets, and some sense of how your business is performing vis-a-vis your competitors. You will win many points with your banker if you bring in an outside accountant to prepare these statements for you. Even if you know how to do your own income statements, using a CPA helps a banker assume a level of confidence.

3. Bankers are not impressed with big deposits. That huge check you just received for the six-month project you finished last month won’t convince your banker of your solvency–it will just make you look like a lousy cash-flow manager. And cash flow is what bankers look at when they consider your ability to repay loans. If you have clients who are paying you in big chunks, try switching them over to incremental billing every two weeks or so. Your banker likes to see frequent and regular deposits, even if they’re small.

4. Bankers like and understand ratios. Provide them with these numbers and you’ll win bonus points, according to Cranfill. The ratio of sales to assets and net profit to assets will tell your banker how effectively you are using what you own to make money. Compare your ratios with those that predominate in your field, as listed in the Robert Morris Associates statement studies, which your banker should have and many business libraries carry. Also consider your debt to net worth ratio and your inventory turnover ratio. The first measures your current debt load, and the second, how often you are turning over your inventory. (It should be often.) These are all bankers’ terms that will help convince Mr. or Ms. Loan Officer that you know of what you speak.

5. The sentence they hate most: “How much can I borrow?” It demonstrates to a loan officer that you don’t know what you need. It’s like asking an English teacher how long the book report has to be.

6. Banker’s hours prevail. The best time to visit with your banker is between ten and noon. Cranfill says. Before then, the loan officer is likely to be in meetings. After twelve, lunch hours, the afternoon blahs, and everyday minutiae dominate.

7. They know all about your checking account. You should, too. Bankers and financial advisors always tell loan seekers to try the bank where they keep their business checking account, but they don’t say why. It’s because banks usually make money on your checking account, and if you’re already providing a bank with money, it will want to keep you happy. Larry Reynolds, Washington, D.C., founder of the Small Business Advisory Letter, recommends that business people ask the bank for an account analysis of their checking account. “The bank keeps a record of what it makes off every checking account. If it shows, for example, that you are running $50,000 a month through that account, the bank might be making $100 a month in investments and fees. When you go in to bargain for a loan, you’re not just talking about the loan, you’re talking about your value to the bank as a customer,” Reynolds notes.

8. The money-lending business may be more seasonal than your banker will admit. banks try to maintain a lending ratio of loans (assets) to deposits (liabilities) of about 75 percent, observes Reynolds. Sometimes they will be above this, sometimes below. If you review your bank’s quarterly-report financial statements, you can get an idea of what time of year the bank tends to have more cash on hand for lending. Many rural banks, for example, are loaned up in the spring when farmers borrow planting money and have extra money to lend after the fall harvests. Some city banks that run big retirement-account promotions may be cash rich in late winter and early spring, as customers feed their IRA accounts.

9. Your banker wants to hear a story. Beyond the facts, figures, and fancy computer-generated charts, the banker wants to hear enthusiasm. “Bankers like to deal with people who are confident and positive, and that’s why most bankers enjoy working with small-business owners,” says Cranfill. “In many cases they may envy them their freedom and independence and the lack of bureaucracy.” If you can tell your banker the story of your business in a way that makes it come alive, you can help him or her feel a part of something exciting.

10. Bankers hate surprises. “Bankers make accountants look like bohemians,” says Reynolds. They don’t want to leave themselves vulnerable to a dressing-down ] by their superiors if something unexpected happens to your business. If you suspect that a major piece of equipment is about to fail, or that a competitor is moving in down the street, let the banker hear it from you, not somebody else. This will help establish trust, and will let your banker know that you are managing your business with your eyes open and without rose-colored glasses.

11. Rates may be negotiable. Once a bank decides to lend you money, try to find out how much that bank is paying for its money. A good measure is its 90-day certificate-of-deposit rates. To get a rough idea of what they can afford to charge you, check the bank’s most recent annual report for their typical interest margin, and apply that margin to the current CD rates. And remember, the prime rate is a guideline; it’s not sacrosanct.

12. Play them off one another. If you have a good, solid, proposal, it won’t hurt to present it at more than one bank at a time. Then you can choose the bank that offers you the best deal.

13. Bankers want to lend you money. They like nothing better than finding a winner. Bank trade publications have been filled recently with news of the “hot new small-business market,” and they recognize that this is where the growth is. Prepare yourself to the hilt and then go in and trade on the special-ness of your business.