Getting into the Mind of a Lender

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Banks and institutions that lend money have a lot of knowledge about the success rate of small businesses.Bankers are often overly cautious in making loans to small businesses. For that very reason it makes senseto study their approach, even though it may seem discouraging at first glance.

Banker's Ideal

Bankers look for an ideal loan applicant, who typically meets these requirements:

  • For an existing business, a cash flow sufficient to make the loan payments.
  • For a new business, an owner who has a track record of profitably owning and operating the same sort of business.
  • An owner with financial reserves and personal collateral sufficient to solve the unexpected problems and fluctuations that affect all businesses.

Why does such a person need a loan, you ask? He or she probably doesn't, which, of course, is the point.People who lend money are most comfortable with people so close to their ideal loan candidate that theydon't need to borrow. However, to stay in business themselves, banks and other lenders must lend out themoney deposited with them. To do this, they must lend to at least some people whose creditworthiness isless than perfect.

Measuring Up to the Banker's Ideal

Who are these ordinary mortals who slip through bankers' fine screens of approval? And more to thepoint, how can you qualify as one of them? Your job is to show how your situation is similar to thebanker's ideal.

A good bet is the person who has worked for, or preferably managed, a successful business in the samefield as the proposed new business. For example, if you have profitably run a clothing store for anabsentee owner for a year or two, a lender may believe that you are ready to do it on your own. All you needis a good location, a sound business plan, and a little capital. Then, watch out Neiman-Marcus!

Further away from a lender's ideal is the person who has sound experience managing one type of businessbut proposes to start one in a different field. Let's say you ran the most profitable hot dog stand in theSquaw Valley ski resort, and now you want to market computer software in Silicon Valley. In your favor is your experience running a successful business. On the negative side is the factthat computer software marketing has no relationship to hot dog selling. In this situation, you might be ableto get a loan if you hire people who make up for your lack of experience. At the very least, you wouldneed someone with a strong software marketing background, as well as a person with experiencemanaging retail sales and service businesses. Naturally, both of those people are most desirable if theyhave many years of successful experience in the software marketing business, preferably in California.

Use the Banker's Ideal

It's helpful to use the bankers' model in your decision making process. Use a skeptical attitude as acounterweight to your optimism to get a balanced view of your prospects. What is it that makes you thinkyou will be one of the minority of small businesspeople who will succeed? If you don't have somespecific answers, you are in trouble. Most new businesses fail, and the large majority of survivors do notgenuinely prosper.

Many people start their own business because they can't stand working for others. They don't have achoice. They must be either boss or bum. They are more than willing to trade security for the chance tocall the shots. They meet a good chunk of their goals when they leave their paycheck behind. This is fineas far as it goes, but in my experience, the more successful small businesspeople have other goals as well.

A small distributor we know has a well-thought-out business and a sound business plan for the future.Still, he believes that his own personal commitment is the most important thing he has going for him. Heputs it this way: "I break my tail to live up to the commitments I make to my customers. If a supplierdoesn't perform for me, I'll still do everything I can to keep my promise to my customer, even if it costs memoney." This sort of personal commitment enables this successful business owner to make short-termadjustments to meet his long-range goals. And while it would be an exaggeration to say he pays this pricegladly, he does pay it.

Copyright © 2000 Nolo.com Inc.

Related resources at inc.com:
The Savvy CEO's Loan Pitch
Sample Bank Loan Application

Last updated: Nov 1, 2000




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