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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.
----------------
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. Visit www.companyworkshop.com or
mailto:jeff@c...
----------------
BUSINESSMATE EZINE is published and edited by
Jess Guim, MCSE.
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