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Obtaining Debt Capital for Your Business (Page 2)
DISCLAIMER - The information provided here is of a general nature and may not apply to any specific or particular situation. It is not to be considered as a legal advice nor presumed to be indefinitely up to date.
The first step the entrepreneur should take in finding a lender is to ask
accountants, lawyers, friends and colleagues who have had dealings with a
bank. The advice of entrepreneurs who have dealt with a bank through good
and bad times can be especially useful. Once a list of names is compiled,
an appointment should be scheduled with each of the prospects for the
entrepreneur to get acquainted with them, and for the lenders to get
acquainted with the entrepreneur. Second, the entrepreneur should meet
with loan officers at several banks and explore their attitudes and
approaches to their business borrowers. Who meets with the entrepreneur,
for how long and with how many interruptions can be can be useful measures
of a bank interest in the entrepreneur’s account. Finally, the
entrepreneur shall ask business references from the bank’s list of
borrowers and talk to the entrepreneurs of those firms. Through all of
these contacts and discussions, the entrepreneur checks out particular
loan officers as well as the viability of the bank itself; they are a
major determinant of how the bank will deal with the entrepreneur in the
future.
The entrepreneur should get to know the lending officer at each bank it
evaluates for his business checking account. If the account is at a branch
office, the lending officer will most likely be the branch manager. The
entrepreneur should establish a relationship and get to know its lending
officer. This person will generally be the entrepreneur's advocate before
the credit committee in the bank making the lending decisions. The more
the lending officer likes and has confidence in the entrepreneur, the
better the entrepreneur’s chances of receiving financing. The criteria
for selecting a bank should be based on more than just loan interest
rates. The entrepreneur should also ensure its lending officer is
experienced enough to provide it the advice the entrepreneur needs, and to
structure financing in the most efficient way possible to meet the
entrepreneur's needs. The entrepreneur's lender should be knowledgeable
about the unique financing needs of a business in the entrepreneur's
industry, give usable advice, and speak the entrepreneur's.
Equally important are: (1) Experience ?is commercial lending all he does, or does he have
enough experience with bank products and services (deposits, letters of
credit, lockbox arrangements) so that he is an all-purpose banker? (2)
Rapport ?does he make the entrepreneur feel comfortable or make the
entrepreneur feel worthless? Visit with the lender, chat, find common
values and bonds. Find a lender that one can trust their child or
checkbook with. (3) Responsiveness ?Does he respond to calls and
messages in a reasonable time? Find a lender that will generally respond
in 24 hours, whether he has the answer or not.
Once relationship is established, it is time to
gain the respect of the lender. While relationship can be established
quickly, respect comes much more slowly. The lender’s first concern will
be whether the entrepreneur can pay back the loan. Accordingly, the lender
will want to be convinced that the entrepreneur knows what he or she is
doing. To do this, the entrepreneur should be prepared to provide a proven
track record of sales and profits and/or a sound business plan projecting
the same into the future. A business plan reflects the entrepreneur's
commercial expertise and shows the lender that the entrepreneur has the
right attitude and direction.
One of the significant changes in today’s lending
environment is the centralized lending decision. Since the loan decisions
are made increasingly by loan committees on credit scoring, the
face-to-face part of the decision process has given way to deeper analysis
of the company’s business plan, cash flow drivers and dissipaters,
competitive environment, and the cushion for loan recovery given the
firm’s game plan and financial structure. Thus, the entrepreneur cannot
longer rely on his or her salesmanship and good relationship with loan
officer alone to continue to get favorable lending decisions. The
entrepreneur needs to be able to prepare the necessary analysis and
documentation to convince the lending committee that the loan will be
repaid. The entrepreneur also needs to compare the loan request with
industry norms and to defend the analysis.
Lenders usually like to see three years worth of proven sales and profits before considering a major loan to a startup. In the meantime, the entrepreneur can continue to seek the respect of its lender. The entrepreneur should schedule periodic visitations with the lending officer to review progress on the business plan (to show how right the startup was in its projections). At the same time, the entrepreneur can solicit financial advice from the lender, similar to having a periodic review by the business' own chief financial officer. A lender can be a source of good financial information just from having advised and worked with so many other businesses, some of which are in the entrepreneur's own industry. Further, the entrepreneur’s line of credit will probably be in the lending officer's lending authority. If so, the startup should apply for one and periodically use it, AND PAY IT DOWN. This will establish a history of creditworthiness with the lender.
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