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.