What To Consider Before Approaching Lenders
By Jeff Schein

Dealing with a bank doesn't have to be like walking through a maze in the dark. Keeping the following points in mind when you approach a bank should help you through the process.

Lenders are looking to satisfy themselves of the following:
1. That the business can make the regular interest and principal payments
2. That the lender can get its money back if something goes wrong

When approaching a financial institution, you are effectively selling the merits of your business and your proposal. Consider the needs of the lender, if you were lending money to someone what would you ask for?

Be prepared to answer questions about your industry, your company, your management, the principals of the company and the financial statements.

If you are looking to finance property or used equipment, you will most likely need an appraisal.

In today's environment, an environmental study may be required on commercial real estate.

Lenders will look at the ability to service debt. You will need to show an ability to service the debt plus a sufficient surplus to cover any contingencies, such as unexpected costs or a drop in sales. Use 1.4 times coverage as a guide; both historical financial statements and a cash flow forecast and projected income statement will show this.

The bank will want to make sure that existing debt, or the addition of new debt, will not bring the Debt/Tangible Net Worth ratio of the company too high. What figure is used depends on the industry you are in and what stage of growth you are at. Don't be surprised if the bank asks for hard security to help support the lending request.

The bank in almost all cases will want a complete personal statement of affairs, and a personal credit history will be reviewed to ensure you are responsible with credit.

Your level of commitment to the company will be reviewed; for example, how much equity have you put into the company?

If your company cannot repay its debt, the bank will evaluate what the secondary source of payment is; this can include security such as businesses assets that can be liquidated, personal guarantees and/or other sources of income.

Give the lender sufficient lead time to review the request, particularly if you are new to the financial institution. It can take some time to review all the information, often clarification is needed and the business may need to be visited before any financing is approved. As well, most often the request needs to be referred to the institution's risk management for review.

A good business plan is important, but keep it concise and don't overdo it on the documentation. The cash flow and balance sheet are of particular importance. Before preparing the final draft of the plan you may want to set up a preliminary appointment with a financial institution, be prepared to answer questions such as: how much money is being requested, why, what terms are you looking for, what are your alternative sources of repayment?

The reality is that banks are conservative lenders and will try to mitigate most or all of the risk away. At the very least you will probably have to provide a personal guarantee to some percentage of the total outstanding amount borrowed.

Fees are a fact of business financing, you can negotiate and may get some reduction (in fact you should always try), but lenders are not in the business of losing money. Interest rates are based on the type of loan, the perceived risk of the business and financing and the security being held in support of the loan.

About the Author

Jeff Schein is a CGA and offers advisory services in the areas of business planning, loan proposals, business modeling, strategic planning, business analysis and financial management for new ventures and growing small businesses. www.companyworkshop.com

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