Believe it or not, the world of banking is a fashion business. Sometimes it's fashionable for the banks to give loans, sometimes it's not. The state of fashion usually depends on the health the economy and the mood of the regulators. When times are tough, it's typically hard to get a loan. And what's the fashion now? Lets just say it's too-too Jimmy Choo.
So I expected an exuberant response from a respected consulting CFO when I asked, "how easy is it to get a bank loan?"
"Most companies fail to get a loan on their first try," says Elijiah Gray, a financial consultant in Doylestown, PA.
I was taken aback. Way aback. Even now, when interest rates are low and the banks are healthy?
"A lot of people assume that a brief meeting and a history of success will convince a bank to make a loan," she says. "After all, that's what banks do, right?"
I think I know where this is going. "Um, wrong?"
It turns out, many companies have an incorrect impression: they think the bank's job is to do its due diligence, and then approve a loan.
But since banks are flooded with potential deals, they discriminate against the applicants who need a lot of work. The ones that look like the information is incomplete, or difficult, or just hard to understand? Well, they get put on the back burner or just refused.
So it just takes a small mindset change on your part in order to get the loan.
"Don't think that the bank has to work to understand your business," Elijiah says. "Think of the bank as a potential investor you are pursuing."
OK. I get it. We need to explain how the business works and then show how the you intend to repay the loan.
So, what does a good pitch look like?
"Start with your company's history, a bit about the industry, clients and vendors. Then show how you create a product, sales and profits. You might also think in terms of strengths and weaknesses. Describe your strengths and make sure the weaknesses--the challenges--are going to be addressed. Will the loan be used to improve those areas?"
Ultimately, the completeness of the information permits the bankers to tell a story--in detail.
We agree that you'll need a bunch of financial documents. We tick them off quickly:
- Historical financial statements. Say, two or three years' worth. Show the financial condition of the company for the year to date also.
- A set of financial projections including profit and loss, balance sheet and cash flow. (I like projections to be shown monthly--yes, monthly-- over 36 months).
- A complete list of assumptions, variables and performance risks. (Think about including an employee census, a summary aging of receivables and payables, and an asset list.)
- A description of all the liabilities--who you owe the money to, what's the interest rate, what's the payment schedule
The Role of the Loan Officer
Many companies misunderstand the role of the loan officer. The person who calls on you is the salesperson and the numbers collector. That's it. This person is the face of the bank, but makes no meaningful decision about your prospects. So who makes the decision? An executive you've never met, and who you may never meet.
To put it bluntly, they don't care that you seem to be nice. They just care that the loan is the best use of their capital.
So since the decision maker never meets you, you should ensure that the information you sent--anticipating the detailed questions an informed investor will ask--speaks for you.