Securing a Loan

Most small businesses look to a commercial bank for capital at some point. It is important to realize that this is not the first stop when assessing your capital resources. Before going to a bank you must have a business plan that has objectified all aspects of the business and determined with as much certainty as possible that you need a certain amount of money and for specifically determined needs.

A banker needs to know several things:

  1. Who are you and what are you trying to do?
  2. Have you done your homework and is your documentation credible?
  3. What is your capacity to successfully execute your plan?
  4. Have you got enough collateral?
  5. Can you provide enough equity capital into the business?

A banker has two important characteristics to remember. First he is a “bottom line” individual. This means you need to bring your discussion quickly to a bottom line which shows him how much money you need and how it will be used. Second characteristic is that a banker will accept no risk in your business. If the banker says he needs to see 40% equity before he’ll loan the other 60%, this is precisely what you must provide. He will also file liens on your assets to further secure his position. There is always risk but his goal is to eliminate risk to his bank.

Develop a sheet that shows sources and uses of cash. You should work out your cash flows carefully and in great detail if possible. Then reduce the detail by combining costs and revenues into a few larger headings so that you create a simpler version of your cash flow. This will make it quicker for a banker to review your financial model and likely it will be more understandable. If the banker needs more detail you can pull out the detailed version and discuss how you came up with certain numbers. The idea is to be prepared for whatever questions the banker will have.

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