Most owners of small businesses believe that banks only lend money to companies that don’t need it. This is not true. However, what is true is that bankers and the banks they represent will not typically make an effort to understand a business when an owner has not made a concerted effort to explain, in an organized and concise manner:
The company’s business
What it will do with the money it wants to borrow
How it intends to repay any borrowed funds
The following hints will help any small business owner ensure that a banker sees their business in the best possible light.
Rule #1 For The Banker: “Know Your Customer”
The first rule of every banker is “Know your customer.” This means that before a bank can make a loan, the bank must have an in-depth understanding of the business, including its history, its future, its products, its customers, its suppliers and its owners. The company’s business plan will normally include these topics.
For smaller business, the bank will rarely distinguish between a company and its owner. This means that the bank will want to understand the personal financial circumstances of the owner, including the details of the owner’s net worth and cash flow, just as the bank needs to understand the finances of the business. The bank will also want to understand the owner’s character. The bank will want to examine the owner’s personal credit history on the premise that the owner will manage the company’s debt similar to the way he manages his personal debt. Also, personal guarantees will always be required. A bank will never consider taking on the risk of lending money to a small business whose owner will not accept the same risk.
Helpful Business Plan Tips
Following are some helpful tips to make a loan request package stand above the crowd:
- The package must be well organized
- The package must be complete (requesting additional information is time consuming for both the bank and borrower)
- Make it easy for the bank to understand the business
- Carefully explain how the borrowed funds will be used
- Carefully explain and document how the funds will be repaid
- Any required forms should be neatly and completely filled out
- Be prepared to offer the bank a lien on all of the company’s assets
- Bankers Also Need To Know
To ensure that you help make the bankers life easier, consider including the following supporting documents in your loan request:
- 2-3 years company financial statements prepared by an independent accountant
- 6 months (in some cases, 1 year) latest company’s bank statements
- Latest accounts receivable aging (if applicable)
- Latest accounts payable aging
- List of 5-10 largest customers an percent of total sales (not applicable to retail businesses like restaurants or shops)
- Form 24 (shareholdings), Form 49 (directorship) , M&A and Business Registration (Form 9)
2-3 years personal tax returns of owner(s)
In Conclusion . . .
A business plan is the company’s plan for the future. The bank will want to know if the company intends to grow and how it will achieve its growth objectives. The bank will want to know how the company will compete. The bank will want to know how the company will function in bad times. Who will manage the business in the event of death or illness? Be prepared with the answers to the banker’s most likely questions and you have increased your chances of raising banking financing.