By John Day
Remember the book called “Catch 22”? It is now commonplace to call a “Damned if you do, and damned if you don’t” situation a “Catch 22”. This is a predicament that many small business owners have found themselves in. Running short of cash, the owner goes to the bank to borrow money, only to find that they don’t qualify for a loan because they don’t have enough money. This is quite maddening to the business owner who laments, “If I had enough money, I wouldn’t be asking for the blankety-blank loan!”
Seems kind of stupid, but you have to understand what bankers are up against. Number one, they have to have some assurance that they are going to be repaid. They have to sell this loan to the “loan committee” of the bank, and they are not about to present a package that will make them look foolish. Furthermore, they have auditors who look very closely to make sure the loans were issued according to bank policies and procedures. If a loan officer has too many loans that “go south”, then their track record starts to affect their career.
This is why you find many loan officers who go strictly “by the book”. These people refuse to look at any extenuating circumstances that might indicate that you would be a “good risk” regardless. Unless you fit into their narrow criteria of “risk” you might as well forget it.
It is best to find a bank manager or loan officer who has plenty of self-confidence, is familiar with how small businesses operate, and is willing to look at the big picture. They can sense whether a loan applicant is solid or shaky. This is the point at which you, the applicant, will want to put your best foot forward.
You may find that as long as you have substantial equity in a home, good credit, and adequate cash flow that you are a tasty morsel in the mouth of a loan officer. However, if you are short in any of these areas, you are going to have to overcome the banker’s natural skepticism.
First impressions are paramount. If you are not organized, you are dead meat. If you are asking to borrow money, then you must possess the skills necessary to pay the money back. These are skills, such as, the ability to think and plan ahead, and the discipline required to operate your business in a professional manner. This means having the know-how to gather information and organize it in such a way that you can make meaningful and timely decisions.
Ask any banker and they will tell you of countless business customers that come in seeking a loan who don’t even know what a financial statement is. There are many other business customers who seek loans that do have a financial statement but haven’t a clue as to what it means. This does not bode well for first impressions.
Compare the individual who comes to the bank, nicely dressed, well groomed and possesses not only a financial statement that he/she understands, but has a plan as to how he/she will pay the loan back. This phenomenon is so rare that a banker will usually sit up and take notice.
If the reason you are short on cash and need a loan is because you are a poor manager who is in denial about your failing business, it will be obvious to the banker. Bankers are objective. They are not going to throw good money after bad. However, if you have a healthy business and you want to finance a new piece of equipment that will enhance your revenue earning capacity then your request will seem reasonable. Perhaps you need a line-of-credit to shore up your cash flow during less productive seasons, and you plan to pay back the line during productive seasons. These are the kind of stories that make good business sense to a banker.
To back up your story, you will need a Balance Sheet and Profit & Loss Statement that reflects the history of your business activity. Included should be an analysis of your business trends using some key business ratios. If the numbers look good, then go for the loan. Remember though, you can’t rely on the banker to recognize all the positive aspects of your business, therefore, you should provide a narrative of how your business works and why the requested funds for the business will help you make more money.