Is your company borrowing for the first time? Here are seven issues to address
For entrepreneurs, winning credit from a bank for the first time is seldom easy. It's especially difficult to get bank financing if your company doesn't yet have a sizable asset base--or the kind of financial track record bankers like to see. But if that's your situation, don't give up: in the current economic climate, more and more financial institutions have begun to expand their lending to early-stage entrepreneurial companies that have the right kinds of growth prospects.
What's the best way to improve your chances of obtaining a loan? Fine-tune your pitch to bankers and other potential financiers so that you're certain to give them all the information that can help make your growing company seem more attractive. The problem is that many one-size-fits-all credit applications aren't tailored to point you in the right direction.
We've found a two-page form that is. This form helps the credit team at Silicon Valley Bank, headquartered in Santa Clara, Calif., detect both companies that qualify for traditional bank financing and those that don't--but that still might make creditworthy candidates for a banker willing to look past the obvious.
We've skipped the first page of this form, since it resembles the applications that many banks rely on. If a prospective borrower aces that part of Silicon Valley Bank's application, his or her company qualifies for a traditional credit arrangement. What's more interesting to us is the second part of Silicon Valley Bank's application, which is designed to judge entrepreneurial companies--especially younger ones--by a different set of standards. Those standards include strong business fundamentals, experienced management, and access to equity investors--but not necessarily either a history of profits or positive cash flow. Companies that meet just the second set of criteria pay more for a loan, but for many it's well worth the additional cost, since they simply couldn't qualify for a more typical bank loan.
Mark Horn, a Silicon Valley Bank senior vice-president and team leader of the emerging-technologies division, thinks that many growing companies could profit from considering the questions on this form.
"Growing companies need to think about all of the issues this raises. It would be great if their owners and executives could incorporate this information into their credit applications or into the business plans that they hopefully submit as well," he notes. "But if not, they should at least be prepared to raise these points during initial meetings with prospective bankers, to demonstrate that they've given all these issues some thought."
Here's the idea: you might be able to persuade local bankers to broaden their perspective when they're analyzing your company's application--but only if you're prepared to make the case that your business has plenty of strengths that don't show up on a typical credit application. So think of this form as a challenge--not a limit--to your creativity. Just because the blanks on the page are small, that's no reason to abbreviate your answers. Elaborate in all cases in which more information can help a banker get a better sense of your business's strengths.
Finally, remember that at almost any bank you'll need to back up your financing pitch with audited financial statements, a well-thought-out business plan, and maybe even your personal tax returns as well. That's just reality. But your proposal will be much stronger if you successfully address the questions raised on the following pages.
We asked Silicon Valley Bank's Mark Horn to explain what bankers look for:
A clear mission
"One of the biggest obstacles for small-business owners who are trying to get financing from a bank is that they often just can't get past one point: how great the company's product is. Being optimistic is fine. But if you can't put some meat behind what you're telling the banker, there's absolutely no way you're going to successfully make your case. A good answer makes it absolutely clear what your business rationale is, why it is different from the competition's, and why it will succeed. It shows focus and your understanding, as a CEO, that your company is something more than just a good idea. One final point here: when you're defining your company, you've got to be concise as well as complete. That's a challenge, but you'll only hurt your case if your pitch seems rambling and unfocused."
A winning product or service
"This is your chance to prove that you've built a better mousetrap. What you want to do is provide a good description of your product or service and its competitive marketplace. Include any empirical evidence--including market research or technical analysis, if that's appropriate--in order to bolster your case about why you believe you will succeed. And above all else, take this question and its challenge seriously: for our bankers a poor answer isn't the absolute end of an application, but it does raise huge questions that will have to be answered before we proceed further. We know all too well just how merciless the marketplace can be to a company that isn't prepared."
An impressive team
"We've chosen our words here carefully. When we say 'define,' we really do mean tell us about everyone--not just his or her name, but a complete description of current responsibilities within your organization. And when we say 'team,' that's what we want to hear about: a group of people who are working with the person who had the original idea to give this company its market advantage, including salespeople and finance people. If you don't have a team on staff, then a banker is going to want to hear how you compensate elsewhere, by building an outside team that might include a top-notch certified public accountant and experienced businesspeople on your board. Be sure to include all the relevant information about them, too, when you answer this question."
Management with a strong track record
"When describing each key person on your team, it's important to describe his or her employment history, with an eye toward convincing the banker that the person's experience will help your company achieve its goals. If people on the team have been part of successful entrepreneurial efforts elsewhere, that does a lot to raise a banker's comfort level. But it can also be reassuring if, say, your key financial executive has experience at a large corporation--experience that could demonstrate an ability to handle the complex cash-flow issues that may arise if your company grows rapidly. Here, too, focus on outside advisers as well as on key executives."
Partnerships that lend credibility
"Be comprehensive here. What a banker is looking for is validation of your idea. If you've succeeded in bringing savvy investors or corporate partners aboard, then that can be a pretty good sign that your idea can succeed in the marketplace. When you're answering this question, it's in your interest to think as broadly as possible. These days there are many different kinds of strategic and other partnerships; odds are pretty strong that a banker would be interested in hearing about any of them that you've created."
Money from other sources
"This question gets to the heart of what bank financing is and isn't supposed to accomplish. As bankers, we do not contribute equity. What we're looking for is a situation in which others have already done that, so we want to see the owner's money involved. And ideally, we like to see other people (or organizations) that have put up equity stakes as well. In some cases, the names on a company's list can greatly enhance its ability to obtain financing, especially from certain banks. But remember, regardless of how big or small your capital base is, it's essential that you provide this information to a banker clearly and concisely. Tell us who put money in, how much was invested, and how much of an equity stake is held. We need to be able to see quickly who the company's decision makers are."
A realistic cash plan
"On this form our question is directed toward a manufacturing start-up, probably in high tech, but the basic issue is one that is relevant for any company seeking financing. What any banker will want to know is, basically, how much money you've already raised and how quickly you've gone through it; how much you're currently spending; and finally, at what point you anticipate earning the revenues to sustain a positive cash flow. If your company is a start-up, the question is, Will you reach that stage when your product comes to market or when you're at a certain sales level? If you want credit to support accelerated growth, then you still need to be able to target a revenue stage at which you will once again be self-sustaining. For entrepreneurial companies, that is absolutely essential to answer in order to ever convince a banker to provide financing."