- Last Updated on 12 November 2013
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One of the least understood concepts is how to make an effective loan presentation to a lender. A borrower is often told to create a "Business Plan" and to include various required documents. However, this generic approach may result in the loan request being relegated to a stack on the manager's desk and perhaps a rejection.
Our objective is to share with you the secrets of selling your proposal to a lender. This is not an academic exercise but rather a professional approach that works. It's similar to the process of gathering information that you would use for an internal management business plan to provide a map to success and profit. In that case, you may want to tweak the format a bit and be more conservative with your projections.
Lenders want to be assured that:
Your business will repay the proposed loan. There are sufficient assets (collateral) to pay off the principal in the event the loan goes into default. (For an internal management business plan, you want to assure yourself, partners, stockholders and key managers that you can make a reasonable profit, pay financial obligations and achieve your stated goals.).
It is your job to provide the lender with these two assurances in a clear and concise format. Lenders reject loan requests when they cannot understand the risk or the risk is greater than acceptable to them. An acceptable entrepreneur's risk is often greater than an acceptable lender's risk.
Choosing the Right Lender
Don't "shotgun" your loan request to many lenders at the same time. Instead, tailor it to the specific lender(s) most likely to grant your request. Cultivate the relationship before requesting a loan. Who do you know that can introduce you to the bank manager or chief loan officer? Open a bank account before making application for a loan. It is more difficult for a lending institution to say "no" to a customer, although it has been known to happen, unfortunately many times.
Ask lots of questions before preparing a loan presentation.
- What are their criteria for giving loans or overdrafts in the present climate?
- Do they finance start-up companies?
- What are their minimum collateral requirements?
- Do they give loans for equipment (e.g. lease) or working capital?
- Do they have a very active department for SMEs?
Do not hesitate to switch to a lender that can better accommodate your borrowing needs.
Avoid a formal submission if there is not a greater than 50/50 chance of being approved because other lenders may find out that you were turned down when they run a credit report.
A winning loan presentation has substantially more sizzle than a business plan designed as a personal planning tool. Your loan presentation should contain several sections with extensive narrative and exhibits personalised to your situation and your lender's underwriting.
Memorandum of Salient Facts
I call it the "memorandum" because lenders sometimes call it that when they pass it around to their loan committee. It should contain the most important facts. Ask if he has an example he's willing to share with you. Ideally, you can use his format with your words. Your mission is to get the loan officer and you in a team effort in presenting your proposal to committee. This is an honest, full disclosure negotiation. You both have the same objective -- to approve a good loan. Trust is the key.
Name and describe the legal entity. Explain why you chose that type of ownership. Describe your business and its owners. Your objective is to sell to the lender the previous success of the company, its principals and officers. Enclose a biography of all the principals and key employees. Dates are not as important as the number of years of related experience you have. Awards and industry recognition of your accomplishments should be noted. Avoid fluff that doesn't relate to the skills needed to make your business successful. Remember that most people have ‘transferrable skills’
Here are some things to keep in mind when preparing your start-up budget and needs for working capital:
- Office equipment (desks, computer, printers)
- Production equipment (if you will be manufacturing)
- Office or production furniture
- Office supplies
- Legal and professional fees
- Business licenses or permits
- Lease deposits
- Re-modelling costs
- Utility and rent deposits and first month payments (this can be quite large!)
- Advertising and promotion
- Working Capital
The Borrower section should include market value balance sheets on the company and its principals, now and 12 months time. Show how there is enough liquidity already in your company and committed by its principals to make the venture successful. The weaker the overall deal, the more of your own cash will be required.
Historical and proforma operating statements must demonstrate the necessary cash flow from operations to cover debt plus have an adequate cushion. The size of the cushion required will depend of the overall strength of the deal and the lender. Show cash flow available for debt service before non-cash-flow items, loans to be paid off at closing and provision for income tax. Don't forget to include your own salary. If your salary will be temporarily deferred, show it below the cash flow available for debt service line and explain how you intend to support yourself and your family without it in the interim period.
Every line item should be clearly explained. All proforma line items must be justified. Successful loan proposals include extensive narrative discussions of how and why the figures were selected. Don't be afraid to take several pages to explain the most important line items such as revenues. These turn themselves into strategies.
Include subjective information and news articles that support your projections.
The Market and Marketing Plan
The words "market research" are often scary to entrepreneurs even if they have honours degrees. They don't need to be. Your challenge is to determine if there are customers for your product or service and how will you get them to buy. Furthermore, how many customers are there, how much will they pay and how quickly will they write you a cheque. Understand that this is not an academic exercise. Its objective is to generate meaningful operating numbers that can be used for your plan. Ultimately, you will have to execute your business plan and place the actual results alongside your budgets to see if you are meeting your benchmarks. So they have to be real.
Providing extensive market information is simply sharing with the lender the research you did before you decided to go into business. If you did your homework, it should be easy.
Describe your competition. Explain how you plan to compete effectively. Be sure to relate the data to your company. Growth in your industry is only beneficial if you can relate it to increased revenues. Your market research is the basis for the proforma operating statements. Refer back to your market research when explaining line items in your operating statements.
This broad information may not reflect the uniqueness of your product or service, specific selling techniques, the personality and size of your company. Therefore, you need to narrow it down by making it a better fit. Perhaps the trade association or chambers of commerce can refer you to some of the actual companies in your industry that may be willing to share information with you. Sometimes established companies are willing to help budding entrepreneurs who are introduced through credible channels. Your own experience may help in the narrowing process but it’s not nearly as credible or objective as a third party source.
Calculate the ratios that the bank told you were important. Always add subjective comments focusing on ratios that exceed the required minimum. Wherever a ratio falls below the lender's minimum requirements, stress the compensating strengths of your proposal and other ratios that exceed the minimum requirements.
Understand that institutional lenders are not willing to take the same risk that you as an entrepreneur are willing to take. Likewise, venture capitalists rarely provide start-up capital for small businesses.
What the Synergy Group can do for you:
- Help you prepare for the bank.
- Focus you on the realism of running your own business.
- Help you do your market research.
- Help you prepare your business to be shown in a favourable light.
- Bring you to a stage that you TOTALLY believe in your business, because it is real, otherwise it’s not, and you will come to that conclusion on your own.
Call The Synergy Group to get a review of your Bank Presentation for free and we will advise you on the best way to go forward. Then if you wish we will hold your hand to make sure it works.
T: +353 1 8215189
F: +353 1 8215191
M: +353 87 2326927