Smart Borrowing Tips to Get a Small Business Loan


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Created by Robert Bahn, Business Consultant and former commercial lender for the Arkansas State University Small Business and Technology Development Center to provide for Business Financing Options workshops to help area entrepreneurs and small business owners improve their ability to secure commercial loans. Tips and hints on what a commercial lender needs to see from your business plan.

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  • Financial services; will vary bank to bank. They’re the source of the $$$
  • Business Checking Plan dba accounts, will probably have to have a checking account there if you want a loan Investments Cds, bonds, etc Cash Management Services online banking, etc Pension & Profit Sharing Plans Loans The best way to finance (vs credit card, etc)
  • Line of Credit - A line of credit sets a maximum amount of funds available from the bank, to be used when needed, for the ongoing working capital or other cash needs of a business. The lines are typically offered for renewable periods that range from 90 days to several years, although extended periods are usually subject to annual reviews by the lender. The maximum amounts vary greatly; interest rates usually float and you pay interest only on the outstanding balance. Money is typically used for daily operations, such as inventory purchases, and to cover periodic or cyclical business fluctuations. Collateral for the loan is often accounts receivable or inventory. From a lender's perspective, the adequacy of the borrower's cash flow is the most critical consideration. A commitment fee may be assessed by the bank for making a line of credit available to the borrower, even if the full amount is never used. An established business with a sound credit history may be able to obtain an unsecured revolving line of credit. Accounts Receivable Financing - This form of financing is a type of secured loan in which accounts receivable are pledged as collateral in exchange for cash. The loan is repaid within a specified short-term period as the receivables are collected. Accounts receivable financing is most often used by businesses facing short-term cash flow problems. The major source of accounts receivable financing for small businesses are commercial finance companies, although banks will also consider receivables as security for a business loan. Inventory Financing - Similar to accounts receivable financing, except the business's current inventory is used as collateral for the secured loan. You can anticipate a very conservative valuation of your inventory and a maximum loan amount that is somewhat less than 100 percent of the lender's valuation figure. Average lender discounting would allow lending of up to 60 percent to 80 percent of the value of your ready-to-go retail inventory. A manufacturer's inventory, consisting of component parts and other unfinished materials, might be only 30 percent. The key factor is the merchantability of the inventory — how quickly and for how much money could the inventory be sold. The loans are typically short-term and the interest rates are similar to those for accounts receivable lending. The most common use of inventory financing is for the purchase of new inventory, especially when an upcoming season requires that you keep additional inventory in stock. Equipment Financing - Unless your business has unlimited cash reserves, chances are that at some point you're going to have to finance an equipment purchase. In fact, even equipment that you purchase for cash is in one sense financed, if you end up borrowing to meet other needs because the purchase depleted your working capital. So, you really should view equipment financing as just one piece of your overall financing strategy for your business. If you anticipate financing an equipment purchase, compare the credit packages offered by your bank, independent financing companies, and the equipment's manufacturer and vendors. These packages can vary greatly in terms of down payment amounts, interest rates, loan durations, security requirements, late payment charges, and similar provisions. Real Estate Loans - Longer terms Construction Loans - Shorter terms
  • Letters of Credit - Letters of credit are not the most common means of small business financing, but they are an important financing tool for companies that engage in international trade. A letter of credit (LC) is simply a guarantee of payment upon proof that contract terms between a buyer and seller have been completed. LCs are just fancy, two-way IOUs often used to facilitate international credit purchases. You, the buyer, go to your bank and request a letter of credit which they will grant you only if you have an adequate line of credit established with them. On your behalf (and for a fee), your bank promises (via the LC) to pay the purchase price to a seller (or his or her appointed bank) if stipulated and highly detailed conditions are met. Working Capital (** Emphasize importance of working capital**) Working capital is the excess of current assets (cash, accounts receivable, and inventory) over current liabilities (short term loans and accounts payable). Working capital represents the funds available to pay for the business's current requirements (one-year or less) and a margin of protection for a company's short term creditors. Working capital is essential for a company to meet the continuous operational needs of doing business Equipment Leasing - For a bank, the leasing business can take the form of either a loan that the borrower uses to lease equipment from an independent source, or a direct lease from a bank subsidiary company that owns the equipment. The duration of the loan is tied to the lease term. Assets commonly leased by small businesses include equipment, vehicles, real estate, or facilities. Most banks require a solid operating history before engaging in leasing agreements with small businesses. Advantages of Leasing : Reduced initial cash outlay, Easier credit terms, Avoidance of financial restrictions , Flexibility in addressing obsolescence, Flexibility in addressing need and suitability, Maintenance support, Current deductibility of rent, Balance sheet appearance Disadvantages of Leasing : Overall cost , No ownership interest , Lost tax benefits , Commitment to property SBA Loans SBA 7(a) Loans up to $2,000,000 and guaranteed loans not eligible for LowDoc or PreQual for some reason. SBA LowDoc Further streamlines the making of small business loans. The maximum loan-$150,000. Loan term usually 5-10 years, for fixed-assets loans can be up to 25 years Good credit history and character. Must have 20-30% of loan amount in cash or collateral Calls for a response from the SBA within 36 hours of receiving a complete application SBA Prequal The Prequalification Pilot Loan Program uses intermediaries to assist prospective borrowers in The maximum amount for loans under the program is $250,000; the SBA will guarantee up to 85 percent for loans up to & including $150,000, and 75 percent for loans over $150,000. The intermediary (usually a Small Business Development Center) then helps the borrower locate a lender offering the most competitive rates. Small Business Development Centers serving as intermediaries do not charge a fee for loan packaging. For-profit organizations will charge a fee.
  • Transition Slide – Will cover the business plan in the next several slides
  • The SBDC has an outline, samples, can help edit, etc
  • First and second year broken down by month. Years 3 – 5 by year (per Brian Buckley at ANB)
  • See Business Plan Outline in Packet Speaker: talk about the areas of the business plan that you focus on when you are reviewing a plan (as you go through the next few slides)
  • What is the product/service? Having a product idea isn’t good enough if there is not a market!! Need to examine the measurability, accessibility, profitability and stability of the potential market. (Dr. Robert Hisrich) Who owns the business? You? You & others? Someone else entirely? What is the organizational structure? Sole Proprietorship Partnership Corporation – S or C LLC
  • Where is the business located? Why is this a good location? Who is responsible for management & operations? Personal Resume Key Staff Members with Resumes Other Key Advisors (attorney, accountant, insurance agent) Who are the suppliers and distributors? Don’t forget back-up suppliers What do they require of you? Financials? COD? Fee? What is unique about the business? Competitive advantage? Why is your business needed? What needs are not being met?
  • Talk about what you expect from people that come in to see you.
  • Take notes. Know your business’s strengths and weaknesses. And be willing to address both. Know your personal and business financial statements. I can’t answer your question because my accountant prepared them IS NOT the right answer! Know your listener! Lenders like Numbers Cash Flow Collateral Have this information available!
  • Give overview quickly, the lender will read the plan after you go The ASBDC has a loan calculator on its web site so you can calculate an approximate payment given your desired repayment terms. Your desired terms may be different from your lender’s, but having one let’s him know you have thought about it.
  • The operative word here is PROCESS. After you leave, the loan officer has work to do and several steps are involved before the loan can close. Let’s look now at what goes thru the loan officers mind after you leave but before a loan decision is made......Next Slide.
  • Can sometimes be a little scary to get inside the mind of a loan officer, but the more you know about what they want to know, the more complete your business plan and the more credible your presentation.
  • These next few slides are a few of the questions the loan officer is likely to ask during your oral presentation. However, your plan needs to address these questions, too, since he will need to write his report after you are gone. Most of us prefer not to leave the lender’s write-up to his memory....better if he can refer back to the plan. Speaker needs to discuss what LTV is and show how it is calculated: Loan $200,000/Value $250,000= 80% LTV LTV expressed as a % of loan to purchase price or appraised value. Who is doing the other 20% is this scenario?? You, the borrower!
  • Nature – Long-term, short-term, LOC Sources of Repayment – Generally have to have 2, prefer to have 3. See opposite page Who need to approve? Loan officer under his authority? Loan officer and one other? Committee? Board? SBA? 5 C’s of Credit – Next slide....
  • Collateral – Type: Real Estate, Equipment, Inventory, A/R? Liquidity – How quickly can I convert it to cash? Marketability – Is there a market for this collateral? Where? How big is it? What will it cost me to sell it? Resale (Liquidation) Value – Anticipated cents on the dollar in forced sale.
  • Is your industry growing, declining, stable? What are the predictions for your industry (or industries in your supply chain)? What various political, economic, competitive, technological and market challenges facing the business. How have you handled past challenges? What impact have past challenges had on your business?
  • These next few slides summarize the presentation.
  • Smart Borrowing Tips to Get a Small Business Loan

    1. 1. Borrowing: A Guide to Getting a Loan for your Business 1  Robert Bahn, Business Consultant  Certified Business Advisor  Arkansas Small Business and Technology Development Center  Arkansas State University College of Business
    2. 2. Arkansas State University Small Business and Technology Development Center •Training • Classes for new ventures and existing businesses • Special Conferences •Consulting • One-on-one advisory services •Research • Sample business plans/Industry start-up guides Market Research • E-news service: Biz Bytes & Tech Track
    3. 3. In your packets • Event Attendance Record Form • Evaluation form • Copy of slide presentation • Training At a Glance • SBA Resource Guide • Sample Loan Application • Loan Review Form • To the Point • Loan Synopsis • Flyer titled “About the ASBTDC” 3
    4. 4. Agenda How can my banker help my business Prepare a Business Plan The Loan Proposal Presentation to the Loan Officer What happens after the loan presentation Finding a loan officer Borrowing Habits after the loan has closed Questions 4
    5. 5. Can my banker help my business? 5
    6. 6. How can my banker help my business? • Business Checking Plan • Investment Alternatives • Cash Management Services • Pension & Profit Sharing Plans • Loans 6
    7. 7. Loans • Line of Credit • Accounts Receivable Financing • Inventory Financing • Fixtures Financing • Equipment Financing • Real Estate Loans • Construction Loans 7
    8. 8. Loans •Letters of Credit •Working Capital •Equipment Leasing •Loans guaranteed by the SBA 8
    9. 9. How do I apply for a business loan? 9
    10. 10. 10 It all starts with Prepare a Business Plan
    11. 11. A complete business plan will…. • Exhibit that the business venture is feasible and profitable. It will show how the loan will be repaid. • Chart a growth pattern for your business. 11
    12. 12. A complete business plan will…. • Provide a useful checklist for implementation. • Serve as a communication tool. 12
    13. 13. • Executive Summary • What is the product/service? • Who owns the business? • What is the organizational structure? • Who is the typical customer? • Where is the target market? • How do you plan to reach the target market of potential customers? 13 A business plan should address:
    14. 14. • Where is the business located? • Who is responsible for management & operations? • Who are the suppliers and distributors? • What is unique about the business? • What customer needs will you meet? • What is going on within your industry? • What trends or issues do you need to be aware of? 14 ...and these questions too:
    15. 15. ....and this one for sure!!! • Financial Strength of Business & Owners • Balance Sheets & Income Statements (3 previous years) • Federal Tax Returns (Business) (3 previous years) • Projected Cash Flow Statement • Projected Income Statement • Personal Financial Statement with Income Verification (3 years personal tax returns) • Use of funds and list of collateral to secure loan • Your startup budget. Price quotes and description of equipment (large) to be purchased. A picture would be helpful. 15
    16. 16. The Loan Proposal Presentation 16 ABC Company
    17. 17. The Loan Proposal Presentation Tips • Make an appointment first, allocate 30 minutes to an hour. • Be on time. • Dress appropriately. • Be honest and direct. • Listen. • Be positive and confident. 17
    18. 18. The Loan Proposal Presentation Tips • Take notes. • Know your business’s strengths and weaknesses. • Know your personal and business financial statements. • Know your listener! • Be prepared to describe your typical customer and your target market. • Be prepared to explain how you came up with your projections. 18
    19. 19. The Loan Proposal Presentation To Banker 1. Introduce yourself and briefly tell the officer about your request and your business. - Purpose of the loan (be specific as possible) - Desired repayment terms (that will benefit you) - Available collateral with values 2. Be ready to answer these other questions:  Where do you bank now?  Have you borrowed from us before?  What is your most recent credit score?  Has your present bank seen this request?  When do you need the money? 19
    20. 20. The Loan Proposal Presentation continued... 3. After the opening remarks, ask the loan officer if there is any additional information they might need? 4. Leave the Loan Proposal and Business Plan with the loan officer. 20
    21. 21. Be sure your proposal covers the following items: Summary of need Company summary Management summary Products and or Services to be provided Marketing • Discussion about Competition • Loan Synopsis • Sources and uses of funds 21
    22. 22. • Projected Income statement (2-3 years) • Projected cash flow statement (2-3 years) • Projected Balance Sheet (2-3 years) • Projected Debt Coverage Ratio (2-3 years) • Breakeven analysis • Market and Industry Report • List of competitors in your target market 22
    23. 23. The Loan Proposal Presentation continued... 5. Ask the officer to call with additional questions or if additional information is needed. Point out where you have written your phone number. It should be on the front of the proposal. 23
    24. 24. The Loan Proposal Presentation continued... 6. Ask when you might expect to hear back from the officer. 7. Thank the lender for their time! 8. Leave - Do not overstay your welcome! 24
    25. 25. The Loan Proposal Loan Processing  Initial Interview (you just did this!)  Presentation of Loan Proposal and Business Plan When You Leave:  Credit Investigation  Credit Report, D & B, References  Financial Investigation  Ratio analysis, funds flow analysis, trend analysis, projections  Loan Decision  Officer Authority, Committees, SBA  Closing (if Approved)  Documents – surveys, appraisals, deeds, etc.  Loan terms & conditions 25
    26. 26. The Loan Officer 26
    27. 27. The Loan Officer Thought Process  What is the purpose of the loan?  Start-Up? Expansion? Equipment?  Does the purpose match the requested terms?  Does the request fit bank policy?  Loan to Value (LTV)  Real Estate in a start-up allowed?  Liquor store?  Borrower financial strength? Equity injection available?  How much is the loan request?  What type of loan is it?  Equipment financing? Real Estate purchase? Construction?  Working Capital, A/R financing? 27
    28. 28. The Loan Officer Thought Process continued... • What is the nature of the loan? • What are the different sources of repayment? • Who needs to approve the loan? • What about the Five C’s of Credit? 28
    29. 29. The Loan Officer Five C’s of Credit • Character • Willingness to pay? • Management experience and capability? • Payment History? • Owner’s character? • Capacity • Management’s ability to generate cash to service debts. Other funds available to service debt during startup or difficult times. 29
    30. 30. The Loan Officer Five C’s of Credit continued... • Collateral • Type? • Liquidity? Marketability? • Resale value? • Shores up other weaknesses • Capital • Total funds available to operate the business? • Owner’s investment? Will the borrower have “skin in the game” Will the borrower be willing to be “all in”. 30
    31. 31. The Loan Officer Five C’s of Credit continued... • Condition • Current and future status of industry? • Current and future status of the national, state and local economies? 31
    32. 32. Finding a Loan Officer • Talk to your friends for a reference. • Talk to your fellow business associates for a reference. • Ask the non-lending personnel at your present bank for a reference. • Talk to the banker that made you your last loan. • Talk to a loan officer at the bank where you have your accounts now. 32
    33. 33. What to look for in a Loan Officer • Someone who: • Has an understanding of your business. • Shows an interest in your business. • Is honest and upfront. • Is willing to offer alternatives or suggestions. • Has the guts to say…NO! 33
    34. 34. Do’s and Don’ts of Borrowing Money • DO: • Make an appointment. • Allocate enough time to talk. • Tell about the Good, Bad and the Ugly. • Be prepared. • Listen to the Loan Officer. • Know your listener. • Take notes. 34
    35. 35. Do’s and Don’ts of Borrowing Money • DO: • Rehearse your presentation. • Keep your loan officer informed. • Ask questions, if you don’t understand what the loan officer has said. • Be reasonable. 35
    36. 36. Do’s and Don’ts of Borrowing Money • Don’t: • Make promises you can’t keep. • Ask “How much money can I borrow?” • Spend the money before you get it. • Negotiate over the phone. • Ever surprise your loan officer. • Be impatient. • Have only one banking relationship. • Make a decision on interest rate alone! 36
    37. 37. Successful Borrowing Habits • Plan Ahead • Lay the groundwork for the loan. • Investigate what is needed. • Make sure your plan includes required information. • Know the expectations of loan officer and the bank. 37
    38. 38. Successful Borrowing Habits After the Loan Has Closed • Communicate with Your Loan Officer • Notify the officer of any changes in the following: • Financial condition • Location of facilities • Key personnel • Building add-ons • Product lines or services • Key advisors (insurance agent, attorney, accountant) 38
    39. 39. Successful Borrowing Habits After the loan has closed • Communicate with Your LoanOfficer • Deliver fiscal year-end business financial statement within 90 days of the year-end. Don’t wait to be asked to provide. Taking your loan officer updated financial information before you are asked is one surprise loan officers like. • Deliver interim business statements to the loan officer on a regular basis (monthly or quarterly). • Deliver updated personal financial statement with income verification annually. 39
    40. 40. Successful Borrowing Habits after the loan has closed • Pay on Time • If you can not make your payment on time be sure and inform your loan officer and see if there is anything that can be done to keep the loan from showing up late. Do this in plenty of time before you are late. There are things a loan officer can do to help if they know about it in plenty of time. 40
    41. 41. Questions? 41
    42. 42. Thank You 42 ASU SBTDC Website Facebook: Twitter: Email: Call: (870) 972-3517