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Summer 2000 Getting a “Yes” from the Bank

Most small-business owners face the inevitable need for outside financing at some point. Specialty retailers in particular often complain that bankers don’t understand the nature of their business, and to some extent, they’re right. But that doesn’t mean you can’t qualify for a loan. As a commercial loan officer for the past 14 years, I’ve worked with many entrepreneurs whose businesses I really didn’t understand. But that didn’t mean an automatic denial.

The key difference between a “No” and a “Yes” is preparation. Assuming your business has been at all successful, you can vastly improve your chances of getting a “Yes” to your loan request if you do your homework—and then some.

Start with this basic idea: you’re trying to “sell” your banker on your specialty retail business. As a retailer, you already know that a key to making the sale is to be ready and able to answer objections. Applying for a loan is no different: you need to know how to counter objections and turn them into sales. Here are the eight most common objections bankers typically raise, and how to prepare to answer each one before you apply for the loan.

1. We don’t make loans this small.

The best way to prepare for this one is to do some homework on banks in your area. Seek out the institutions that cater to local businesses like yours. Check with other business owners, your accountant, your attorney and even your competitors to see who they recommend.

You’re likely to find that the smaller community banks and regional banks are generally more responsive to locally-owned businesses. Most local banks have carved a niche by making loans to small businesses such as yours. And many regional banks have set up centralized small-business centers to streamline the approval process.

2. I don’t know enough about you or your business.

Referrals can help here, also. But regardless of whether or not you are given an entrée into the bank, there are a couple of other key steps to take to ensure that the loan officer is properly informed.

First, create your résumé. Second, write a short piece about the background of your own business—how and why you started it, how much it has grown, and any significant milestones you reached. Include this material with your loan application.

3. You haven’t demonstrated what you need the money for.

Many small business owners go to the bank without a clear understanding of exactly how much money they intend to borrow, nor the purpose for which the funds will be used. That mistake can cost you a “Yes.” Bankers nearly always react negatively to answers like “I’m not sure” or “How much will you lend me?”

Before you go to the bank, do an in-depth analysis of how much you need to borrow, so that you understand exactly why you need the money. Having this information with you when you go to the bank shows that you have adequately analyzed your borrowing need.

4. Your numbers don’t support the loan request.

There are no easy answers to this objection. But there are a couple of things you can do to decrease the likelihood of hearing it.

First, make sure your financial information is up-to-date: i.e., not more than one quarter old. And it must be professionally presented. Second, you have to understand your numbers. Even if you view the numbers part of your business as a necessary evil and you let your accountant “handle all that,” it’s important that you understand your financials when you apply for a loan. For instance, if your profit margins have been going up, you must be able to explain why—maybe you’ve sold many more high-end items over the past few months, or you’ve recently raised prices, or you found a supplier who offers volume discounts that save you money.

Third and most important, if your store has been only marginally profitable or even losing money, there’s still hope. But it won’t be easy. Bankers are trained to make decisions based primarily on the borrower’s ability to generate sufficient profit.

So accentuate the positive. If you’ve been in business for five years and lost money only in the past year or so, emphasize your success during the first four years, and show why your profit problems are only temporary.

5. What do you plan to do in the future?

There are two actions you can take to cover this objection before it’s raised. The first is to prepare a business plan—a blueprint you intend to follow to ensure your business’s success down the road. The business plan doesn’t have to be the length of an epic novel, just a clear, concise presentation of exactly where you are heading.

The second is to compute financial projections. Use your past performance and factor in any known changes (e.g., expanding your location or adding a new line) to create assumptions for sales growth, gross margin, operating expense levels, interest expense, and taxes. Plug these numbers in, and you can project a bottom line.

It’s best to use outside professional help in preparing your business plan and projections. They’re vital components of your loan application package. But if you can’t afford an accountant to help you generate them, local libraries, bookstores and the Web have excellent information on how to prepare them yourself.

6. You don’t have enough collateral.

Specialty retailers complain that lenders lack an adequate understanding of the market value of their inventory. But bankers aren’t experts on most of the collateral they make loans against. If you want a loan to purchase inventory, include solid documentation—invoices and the like—that verifies the value of your collateral.

But don’t expect the bank to lend dollar-for-dollar against the collateral. Banks have guidelines for setting loan-to-collateral value ratios. For example, banks generally lend no more than 80-90 percent of the value of a car or real estate, 70-80 percent of machinery, equipment and accounts receivable, and 40-60 percent of inventory. You may also have personal assets (e.g., debt-free autos, bank certificates of deposit, stocks, real estate equity) that could be used as collateral to adequately secure the loan. In other words, convince the lender to say “Yes.”

7. Your business does not support the loan on its own.

Retailers and other small businesses hear this objection often. Most banks won’t lend to any incorporated small business without personal guaranties from the owner. A guaranty provides a secondary repayment source for the loan in case the small business can’t pay.

So if your business is incorporated, go ahead and offer your personal guaranty. The banker will probably ask for it anyway, but offering it up front demonstrates a full commitment to your business that will enhance your chances.

8. Don’t call us—we’ll call you.

Loan bankers are busy people, which often means a lengthy response time. If your banker doesn’t offer a specific response date after you submit the complete loan package, don’t be afraid to ask for one. Try to get the lender’s commitment to respond within a week, which is a reasonable length of time. Then if that week passes and you haven’t heard, call. Ask the lender if there is any other information needed for your request. Then ask for another specific response date.

Along the same lines, it’s perfectly acceptable to take your loan package to more than one bank at the same time. Doing that may lead to more varied options for financing, and it can shorten the time it takes to get the needed funds if your first choice of lenders turns you down.

Applying for a small business loan is never easy. It’s a time-consuming and sometimes nerve-wracking process. But if you do your homework and prepare to answer these eight common objections, you improve your chances of getting a “Yes.”

J. Tol Broome, Jr.

J. Tol Broome Jr. is a freelance writer based in Greensboro, N.C. He can be reached by e-mail at .

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