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Getting to "Yes"

2/16/2015

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Business owners often ask me, “What do I need to do to get a loan?”  The standard response from most people is “Well, you need a business plan and blah, blah, blah…”  Sure a business plan might be required, but many loans are made without one (unless the business is a start-up, then fill up with gas, press the starter and fire up the word processor).  

Unlike many of my other blogs, I honestly can say that this one is not particularly funny (or weird and stupid, depending on the readers’ sensibilities), but it informative e and accurate.  So, here is my list of things a borrower needs to do to get a lender to say yes.  These are in no particular order.  They are more of a crazy stream of consciousness, randomly dripped on the page like a Jackson Pollock painting.

Number 1:   Be realistic

Theoretically, every idea is worth a million dollars.  Exhibit one; I give you the Chia Pet, the Member’s Only jacket and anything pitched by the creepy guy Vince on the infomercials.  All of these ideas and products sold well, but I would not have loaned the inventors anything.  Because for every Chia Pet, there is a borrower who comes to the office with a riding mower and a rake, stating, “By mowing counter-clockwise I will differentiate myself from the competition and take 90% of the coveted lawn mowing market.”  C’mon Man…! When a potential borrower comes with seemingly unrealistic expectations, I can’t hear anything but counter-clockwise mowing and the rest sounds like Charlie Brown’s teacher’s voice.

Number 2:  Be Prepared

A borrower should always be prepared.  I am not necessarily talking about being Boy Scouts prepared; ready for a blizzard, a heat wave or a dinosaur attack.  Come ready to answer questions in the most clear and concise ways possible.  Do not hard sell the deal.  The best way to convince a lender is to know the business, the competitors and the market served.  It is also okay to bring personal and business tax returns, financial projections and any other documentation that helps the lender understand the deal.

Number 3: Understand Financing Needs

Borrowers should never go into a meeting with a lender without understanding their financing needs.  Whenever a potential borrower asks “How much money can I get?” I immediately think, “I don’t know and this person does not either.”  Red flags are popping out of every drawer in the office and alarms are ringing the klaxon of danger, Will Robinson…danger.  It is so critical for the borrower to understand where every penny (give or take) of the loan will be used.  Remember, getting a business loan is not at all like getting a home loan.  A borrower is not “pre-qualified” for an amount based solely on financial condition (credit, income etc).  Each deal is unique and underwritten on a case-by-case basis.  This is where a projection can be so helpful to both the borrower and the lender.

Number 4:  Understand Personal Finances

A borrower’s personal finances are so critical when making a lending decision.  Bankers look closely at personal credit scores and current financial conditions.                 Lenders review the personal balance sheet (assets= ownership, liabilities= debts, the difference= net worth) and financial condition of applicants to help determine business credit worthiness.

Personal credit is reviewed very closely since it can be an indication of responsibility and reliability.  However, this is also reviewed on a case-by-case basis.  Sometimes seemingly low credit scores are not indicative of poor credit, but are based on a period in a borrowers life that may have presented some challenges that are no longer valid.  That is why it is important for borrowers to know their credit scores before that initial meeting with the lender and bring up the issue for discussion early in the process.  If the lender feels at all mislead regarding the borrower’s credit (applicant not talking about the issues early in the process, preferably during the first meeting), the deal will most likely be dead, with no hope of a work around option.                     

Number 5:  The Down Payment

Some sort of owner injection is required in almost every deal.  For some deals, especially the 504 loans made by Enterprise Development, land equity (land+building) is enough.  If the borrower can demonstrate 15% equity in the property, then the borrower might not need to invest any actual cash.  Other loan types are not quite as open to equity only projects.  Small business loans that do not involve land often require the borrower to inject up to 20%.  It is the whole “skin in the game thing” that I have mentioned in other blogs.  In case things go badly, it is much harder to walk away if the borrower is in as deep as the lender.

These are only a few steps to get a lender to say yes.  It really is so important to understand the items listed above and to act on them before seeking a loan.  By going in to the meeting prepared, the borrower can create a relationship with the lender, and in return, the lender will be excited to help the borrower through the process.

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Sympathy for the Lender

2/11/2015

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One of my favorite songs of all time is “Sympathy for Devil” by the Rolling Stones.  It is so brilliant how the song creates empathy for, obviously, a very unlikable protagonist (antagonist, really).  I was listening to the song the other day right after I was listening to a talk radio station where a caller was complaining about how he could not get a loan from his local bank.  This exchange made me think about writing this blog.  Lenders are often unjustly maligned.  No banker will pass up a good deal for without a reason.  No lender passes on deals just to be mean.  This column is not really asking for sympathy, just understanding.  So…(cue the bongos and the backup singers, get Keith Richards some coffee and …) please allow me to introduce myself, I am a man….

Lenders are not very hard to understand.  Like other business people, we hate losing money.  We are not in the risk capital game.  If a borrower is interested in risk capital, they should ask rich Aunt Edna for an investment, or Mark Cuban, if they can get on “Shark Tank.”  Is it any wonder that investors expect big returns on investment while most lenders expect modest returns?  The smaller the risk involved, the smaller the return. 

Let me get all nerdy here for a minute to explain the basics of risk management and credit underwriting.  Since many banks are now offering interest rates between 4% and 5%, they obviously want deals that are relatively safe.   Saying “no” to a deal is not at all personal, it is about where that deal fits into the risk-reward continuum.  For example, if someone walks into the office with a great idea, but maybe lacks experience, I might get nervous at the lack of actual operational history.  I feel confident they have a good chance of succeeding.  Let’s say this imaginary business has a 75% chance of success.  However, my 5% return does not give me a big enough reward to compensate for the 25% chance of a major crash and burn.  A 15% return on the loan might make me more comfortable, but I am prohibited to charge what might be considered usury interest rates.  So, even if this deal has a 75% chance of success, I would still decline the loan.

Based on the sure thing policy, how do lenders help ensure they get there investment back?  Two words that every borrower hates to hear (ominous background music (maybe “Paint it Black” by the Stones)…lighting flashes and thunder crashes)…the “personal guarantee.”  Almost every deal requires a personal guarantee.  Refusing to give a personal guarantee is like refusing to acknowledge a basket in basketball behind the arc counts as three points.  You can say it counts as ten, but it counts as three.   These are the rules.  As a lender, I am not going to shoulder all of the risk.  Great gamblers are not the ones who win when there is no real money changing hands.  I am a great poker player when I am not playing with my own money.  When I have to pop out my own wallet, I stink.  The same theory goes with lending.  Lenders never want the borrower only playing with the house’s money.

Policies can also get in the way of lending.  Most lenders like to keep balanced portfolios.  No one wants a portfolio top heavy in real estate or restaurants or potato farms.  A portfolio too heavy in any sector can bring down a lender if that sector crashes.  For example, I might turn down a perfect deal…one that smells like honeysuckle on a dewy spring morning, if I have too many similar businesses already in my portfolio.  Though that portfolio sector might smell like honeysuckle now, it can smell, well, like a field of cow patties on a 105-degree day in a few years.  Portfolio management and diversification is critical from a lending perspective.

Pleased to meet you
Hope you guess my name
What's puzzling you
Is the nature of my game


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