Tricia Belden quit a comfortable job as grooming expert for a reputable beauty salon in Boston to set up shop on her own. “I had had enough of working for other people and wanted to make my own money,” says the 28-year-old. When she approached the bank for a loan, however, she came crashing down to earth. “I realized that what I thought of as a cast iron business plan was, in fact, full of holes. In fact, I hadn’t even formalized a business plan down to the last detail, and the financial adviser at the bank was polite but firm in refusing my loan application.”
Particularly for first-time entrepreneurs, a business loan can be hard to obtain, because banks are notoriously picky about the kind of business plans they support, and want exact details about the revenue model that the entrepreneur has in mind. And yet, the capital required to start any business is available only from banks or similar financial institutions, so a business loan is an integral part of starting a business.
Even for established businesses, loans play a crucial role when it comes to meeting several financial requirements, and the documentation involved in obtaining the loan is no less exhaustive. As Sam Neeson of Fort Lauderdale, Florida, points out, “No business expansion is possible without a business loan.” Sam should know. As a dealer in wood furniture, he has had to approach his bank more than once for a loan to tide over a crisis. “The trick is to pay back the loan without disturbing your cash flow, and actually use it to increase your revenue,” he says.
But before you can get there, you have to negotiate the choppy waters of meeting with the financial expert. Particularly for new ventures, almost 75% of which are likely to run into trouble within the first three years of their opening, banks have a policy of zero tolerance. So the first aim is to reassure the bank of the soundness of your business model.
“You have to produce a complete business plan,” says Tricia, whose loan application was approved at the fourth attempt. “I made the crucial mistake of getting a business plan prepared by a financial consultant, and then failing to explain the details because the consultant was not present at the bank meeting. Obviously, the bank saw me as an unreliable client who did not even know her own business.” The best thing, therefore, would be to personally prepare your business plan, or at least have a hand in its preparation.
Adrian Cole, a trained mountaineering instructor who set up a dealership in mountaineering and hiking boots when he retired from the trail, says he was advised to prepare a brief summary of his business plan so that the bank had a clear idea of his potential before actually progressing to the plan. “I found the advise immensely helpful, because not only did the summary allow the bank officials to gauge my potential and decide if they wanted to g any further with me, I found myself gaining a firmer grasp of my revenue model as I wrote it,” Adrian says.
Arnold Sayers, a financial consultant, recommends that all potential borrowers should ask for at least a 25% longer repayment period than they need and about 30% more money than they need. “This is a vital buffer, because even the best laid plans can go awry, and you may well bless the longer rope that you have been allowed to play with,” he says.
It also helps to think of the questions that you are likely to be asked and have your answers ready. Also, never negotiate terms and conditions before the loan offer has been made. “You don’t want to come across as either desperate or cocky,” says Sam. “Also stay away from personal guarantees, and gauge the value of the security that the bank is asking for. Above all, be prepared to answer these three questions: how much do you need? How will you use it? How will you pay it back?”
It would be ideal if you could include credit reports on all your principals, and collateral and cash flow information. None of it is going to be easy, but it isn’t meant to be. And remember, larger national banks are generally not as sympathetic to small business as local banks. For obvious reasons, larger banks will cater to businesses that can offer significant collateral, so their lending requirements will be more stringent.