Growth always requires cash. Whether a business is expanding into new markets, growing their current offerings, or being bought out by current employees or a strategic buyer, funds are always required.
Sometimes a company may have the cash on hand to cover these plans and goals, but more often, financing is needed. But approaching a bank for a loan often begins to stir up anxiety and confusion, with the owner having no clue where to start. Or on the flip side, an owner may think the process is relatively simple and not realize how much prep work needs to go into a loan request.
Business owners are often entrepreneurs and by nature, are risk takers. Bankers are the opposite. When they make a loan, they have to be 100% right that it was a smart loan, 99% of the time, so they tend to be risk-adverse. When applying for a loan, it’s important to keep this in mind.
Recently, I was approached by a client that I’ve worked with for years. These business owners are ready to retire and want to sell their business to a group of co-workers/mid-level managers. Neither buyer nor seller have any experience in business acquisition financing and the buyers have no experience in bank financing for a business period. This client (the seller) realizes the complexity of finding financing, especially for a group of buyers that have plenty of experience in company management, but no experience asking a bank for a multi-million dollar loan. So, they hired me to help them with the process of putting together a loan package and making a bank presentation.
Whatever your situation, here are 3 tips to nail your bank meeting.
1) Have a clear loan request.
It’s not enough to go to a bank and say “I’d like to borrow some money” and have them figure out the details and approve an amount decided by them. You need to know exactly how much money you believe you’ll need and be able to explain what it will be used for and how it will be paid back. This should include interest rate requested, collateral being offered, and personal guarantees.
2) Have a compelling case for the loan.
Know about the 5 C’s: character, collateral, cash flow, credit, and conditions.
Character– Banks want to be sure they’re loaning money to people of integrity who will follow through on the terms of the loan. So, character is important.
Collateral– Banks attempt to fully secure a loan they make. They assign a margin to certain types of collateral (25% margin on AR and 20% on real estate, for example). If the bank can’t fully secure the loan with margined collateral of business assets, personal assets are in play from the bank’s point of view.
Cash flow– Banks wants to be sure the business can cash flow the payments, so they look for cash flow from the business to cover loan payments with a 25% cushion. If payments are $500,000 per year, they’re looking for cash flow to be $625,000.
Credit– Banks use your personal credit score as a proxy to show how you may pay your business credit obligations. They’re usually looking for a credit score of 680 and above for each guarantor.
Conditions– Banks want to understand the overall economic conditions of your industry and what the outlook is. Is your company currently showing a good growth rate? Are forecasts favorable for your industry? All of these together help you make a compelling case that you are a strong borrower and customer for the bank.
3) Have command of your company financials.
It’s important to understand the financial aspect of your business, what your financials are telling you, and be prepared to address any weaknesses. A command of your financials includes the balance sheet, income statement, and cash flow statement. Know your trends year-over-year in each of these 3 financial statements and articulate the reasons why they’re up or down. Also, know your debt coverage ratio, EBITDA/annual bank loan payments.
Growth is always an exciting time in a company. Keep these tips in mind so you’re prepared before you make your loan request to your bank.