What Banks REALLY Want From Entrepreneurs

A few weeks ago I told you that, yes, it really is tougher to get a small business loan these days. Since then I’ve met with a number of lenders in Canada, the UK and the U.S. all of whom would like to increase their small business loan portfolio. But they need your help to do it.

All of them told me that they love lending to small businesses who are really prepared. Here’s how to be really prepared:

1. Have a good story and tell it well. For a lender, your story is a good one when it connects all the dots to show solid cash flows that can repay the loan.

Here are the dots:

• You must know how to reach –▸
• a large enough set of clearly defined potential customers who –▸
• have a burning need that –▸
• they’re willing to pay you well to solve –▸
• rather than your competitors.

2. Ensure your team is experienced. Your lender won’t wait for you to figure out how to run your business. You need to show her that your team has solid, practical industry and business experience from day one. Make sure you include the resumes of all key people and, in your story, tell her why each person is there.

3. Have some skin in the game. Your lender won’t give you 100% of the cash you need. They expect you to share the risk with them – in fact, they expect you to shoulder most of the risk.

Lenders often ask for collateral to cover the loan amount and/or a cash injection from you to cover any shortfall. Let’s say you’re a plumber and need to buy a truck and tools that cost 50,000. Your lender might be willing to provide 75% of this (37,500) and they’ll use the equipment as collateral. They’ll also require you to contribute the remaining 25% (12,500) in cash.

If you’re not buying equipment your lender will want you to provide some other collateral to cover their contribution. You’ll also need to put in the remaining cash.

4. Have a solid credit rating. If you have an established business, you’ll need to show the bank several years of profitable operations. If this is a new venture, the bank will invariably look at your personal credit score. A good credit score, by itself, may not be enough to get a loan approved but a poor credit score is often the reason for a loan being denied.

Remember, your lender wants to lend you money but it’s up to you to be prepared. So show her a solid concept, strong cash flows, experienced management, and no lender risk.

If you’re missing one or more of these items, tune in tomorrow and we’ll look at some options.

 

First published November 24, 2014