Title: Scott E. Baker Senior Vice President First Citizens Bank (919) 716-4164
1Scott E. BakerSenior Vice PresidentFirst
Citizens Bank(919) 716-4164
- Purpose of Today
- Analyzing the opportunity (make sure it is an
opportunity) - Doing your homework prior to obtaining the
financing - 3. Meeting the bank (primary lender) prepared
2Questions to Consider Before Meeting With a
Lender/Investor
- Any lender or investor you approach for funding
will evaluate your strengths and weakness as the
owner or manager of your business. Below are
several questions that lenders or investors may
ask you when evaluating your ability to run your
business. Consider your answers carefully the
answers could be deal makers -- or deal breakers. - 1) How well do you get along with different
personalities? - Business owners must develop a working
relationship with a variety of people including
lawyers, accountants, bankers and clients. Can
you deal with a demanding client or an unreliable
vendor in the best interest of your business? - 2) Do you have the stamina to run a business?
- To run your own business is a lot of work. Can
you face twelve-hour workdays, six or seven days
a week? You must have physical and emotional
perseverance. - 3) How good are you at making a decision?
- Often you are required to make quick decisions
under pressure and independently.
3Questions to Consider Before Meeting With a
Lender/Investor
- 4) How well do you plan and organize?
- Organization of finances, inventory, schedules,
production, etc. can help avoid potential
pitfalls. Many business failures could have been
avoided through better planning and organization.
- 5) Is your drive strong enough to maintain your
motives? - A leader must have a strong drive to avoid
feeling burned out by carrying all
responsibilities on their own shoulders. - 6) Will your spouse or mate support you?
- The first few years of business start-up can be
hard on your family. The strain of a
non-supportive spouse may be hard to balance
against the demands of starting or expanding
business. There is usually some financial
difficulty for a few months or years until a
business becomes profitable. You and your spouse
must be ready to adjust to a lower standard of
living and understand that you may be putting
your family assets at risk on a daily basis.
4Seven Important Questions the Lender Will Ask
- How much money do you want?
- Decide how much money you need to borrow for a
specific purpose - before you go to the bank.
This will take some careful thought and research
into exactly what you hope to buy with the money
(equipment, personnel, another firm) and how much
it will cost. It's best to be as precise as
possible. For example, if you want to set up an
Internet business and you need a web server, tell
the bank the specifications and brand of the
server, not just that you want "a server." Your
banker will double check your figures and prices,
so be prepared to explain your choices and your
overall plan. - 2) What are you going to do with the money?
- As far as the bank is concerned, there are only
four ways to spend cash from a loan 1)You can
buy new assets 2) Pay off old debts 3) Buy out
a partner or associate or 4) Pay for expenses
(equipment and the like) needed to generate new
revenue. Avoid saying that you are "just going to
use the money for working capital." Although this
is often listed as a choice on forms and in Small
Business Administration documents, many bankers
consider this answer a sign that you don't have a
well thought-out plan.
5Seven Important Questions the Lender Will Ask
- 3) Why is this loan good for your business?
- It may seem like a very obvious question, but
lenders have a limited amount of money available
for small businesses. The lender wants to give
this money to support businesses that have well
thought-out plans and that represent a low risk
for default. Be prepared to discuss in detail
what the money will do for you -- not just what
you plan to spend it on, but what spending the
money will mean for you from a competitive and
growth standpoint. Don't forget to explain why
your business represents a good risk. - 4) Why do you need the bank's money to implement
your plan? - The thinly veiled question here is, "Why don't
you have enough money of your own to do this?" In
this case, the lender is trying to find out
whether an internal management problem is to
blame for your financial need, or whether there
are other reasons (such as to support rapid
growth). If you have prepared a careful answer to
question 3, this question will be easy to
answer. Don't get flustered emphasize the
benefits of the loan to your company's
competitive position and growth plans.
6Seven Important Questions the Lender Will Ask
- 5) When will you pay the loan back?
- When the lender asks this question, he or she is
expecting to see a cash flow projection that
clearly indicates that the business will bring in
more money than it spends so that the loan can be
repaid in a timely fashion. This statement will
be most effective if you have a positive cash
flow in the months or years prior to applying for
the loan. To demonstrate this, you'll want to
provide historical data as well as future
projections. - 6) How will you repay the loan?
- When you answer this question, don't be vague.
Use your financial projections and your business
plan to convince the banker of the long-term
profitability of your business. Be prepared to
supply a copy of your business plan, complete
with financial projections.
7Seven Important Questions the Lender Will Ask
- 7) What happens if your plans don't work out or
your projections are off? - This is why many banks require collateral and
personal guarantees (putting up personal assets
to guarantee a loan). In answering this question,
you'll want to assure the banker of the value of
your collateral in case your projections are not
correct. While entrepreneurs are generally
positive about their chances of success, bear in
mind that bankers are inevitably somewhat
skeptical. - A Note About Collateral Real estate
(owner-occupied or commercial) that is used as
collateral must be appraised by a third-party
appraiser for loans of 50,000 or more. Other
types of collateral include marketable
securities, equipment, vehicles, boats, stocks,
bonds, and similar items. Without sufficient
collateral, a bank will often require the owner
to offer a personal guarantee - meaning that the
owner will tie his or her personal assets to the
business for the purposes of the loan. The loan
officer does this because he or she figures that
while you might sacrifice your business in
bankruptcy, you will think twice before you give
up your personal assets.
8Before You Go to the Bank Check Your Credit
Rating
- Before applying for any loan, it is a good idea
to check your personal and/or business credit
history to make sure there are no unfavorable
items on the report. This is essential, because
running a credit check is the first thing that a
loan officer will do after receiving your loan
application. If there is anything negative on
your credit report, it could make it more
difficult for you to get a loan. - There are three major credit bureaus that most
banks get reports from. These are - TRW Consumer Credit Service
- 12606 Greenville Ave.
- P.O. Box 749018
- Dallas, Texas 75374
- (800) 422-4879
- Trans Union Consumer Relations
- 1561 E. Orange Thorpe Ave.
- Fullerton, CA 9263
- or
- 760 Sproul Rd.
- P.O. Box 403
- Springfield, CA 19064-0403
- (216) 779-7200
- (800) 851-2674
9Before You Go to the Bank Check Your Credit
Rating
- Equifax Credit Information Services
- P.O. Box 740256
- Atlanta, GA 30374
- (800) 879-4094
- (800) 685-1111
- Each of these credit bureaus is required by the
Federal Credit Reporting Act (FCRA) to tell you
what is in your file - and to allow you to
correct any errors on your record. You are
entitled to one free credit report each year - if
you ask for more, you may have to pay a fee. It's
a good idea to order a report from each of the
major credit bureaus. Mistakes could appear on
one report and not another, and you cannot be
sure from which vendor a bank will order a
report. - How to Remove Unfavorable Items from Your Record
- When you receive the credit report, look for
possible errors in the file. Negative items that
are not true or even partly untrue should be
disputed. You also should dispute any vague,
outdated, or misleading items.
10Before You Go to the Bank Check Your Credit
Rating
- To dispute any item, send a letter to the credit
bureau. Some bureaus will accept phone calls
about disputes. Whether you choose a letter or a
phone call, be organized and level-headed when
you assert your claim. It is a good idea to check
your records for evidence, such as canceled
checks or letters, that can be used to prove a
mistake was made. Be sure you have all of your
facts straight and can present them in a precise,
logical, brief fashion. Also, be prepared to send
or fax a copy of your evidence. - By law, credit bureaus must investigate any
disputed information and either issue a response
to you or correct the problem within 30 days. If
the source of the original, negative data does
not respond to the credit bureau within 30 days,
the bureau will remove the item from your report. - If your report was corrected, you may ask the
credit bureau to send corrected copies to anyone
that received a copy of your report within the
last six months. - If mistakes were not made and there are negative
items on the report, you have the option to
insert a consumer statement explaining any
item(s) on the report. The statement must be 100
words or fewer.
11Before You Go to the Bank Check Your Credit
Rating
- If you do have a less than sterling credit
rating, it is a good idea to work on improving
your rating. Consider taking out a small loan
that is tied to your savings account. Be careful
to make every payment ahead of the due date, and
pay off the loan before the maturity date. This
will show the banker that you can fulfill your
obligations, and will increase his or her trust
in you. This will make it easier to qualify for
other, larger loans later. - IMPORTANT NOTE Be extremely wary of credit
repair agencies. If you consider using one, be
sure to investigate it thoroughly in advance by
calling the Consumer Fraud Agency of your state
(and the state the agency is in, if it is in a
different state), as well as the Better Business
Bureau in the city the firm is located in. Many
of these firms do little to repair your credit.
12Checklist of Documents You'll Need to Apply for a
Loan
- ALL LOANS
- Most current financial statement for the
business. (Many lenders have their own form that
they'll want you to use to present this
information. Ask the lender for a copy of this
form and use that to display your financial
statement.) - Income tax returns for the last two (2) years for
the business. (Include reasonable supporting
schedules, such as depreciation schedules or
other lists of tangible property used in the
business.) - Other business records, such as aged accounts
receivable and accounts payable reports, lists of
property owned by the business, lists of
inventories, etc. - Personal, current financial statement. (Many
lenders have their own form that they'll want you
to use. Ask the lender for a copy of this form
and use that to display your financial
statement.)
13Checklist of Documents You'll Need to Apply for a
Loan
- ALL LOANS
- Personal income tax returns for the past two
years. (Unless your company has a long operating
history and substantial assets, you should expect
the lender to require the individual guarantee of
the principal owners of the business. Generally,
lenders will want to see two years' worth of
income tax returns.) - Current business plan or other specific
explanation of how you plan to use the loan
proceeds. (It is hard to put a specific
definition on this document. In most cases, you
will be borrowing money for specific purposes to
start a new business to build, buy, or upfit
space to purchase or lease vehicles to finance
inventory or for working capital. Whatever the
purpose, including a detailed description of the
use of proceeds is advisable.) - Resumes of the company's principal owners and
managers (even if not owners). (The object here
is to show that owners and managers have
sufficient experience to successfully operate the
business.)
14Checklist of Documents You'll Need to Apply for a
Loan
- ALL LOANS
- Copies of any important business contracts.
(Include copies of space or vehicle leases and
copies of any other notes, mortgages, or security
agreements including a recent statement from the
lender showing the payoff.) - Depending on the size of your company, you may
want to include a list of employees, their duties
and salaries, including any rights or bonuses or
equity promised. As a general rule, this is
advisable if payroll is a significant expense for
the business or if any employees have long-term
(one-year or more) contracts.
15Checklist of Documents You'll Need to Apply for a
Loan
- SPECIAL SITUATIONS
- If you are buying a business, contracting a
building, upfitting leased space, buying
vehicles, etc., include a copy of the Purchase
Agreement, Construction Agreement, etc. - If you are building anything, include copies of
drawings of the improvements. - If you are buying commercial or residential
rental property, include a rent roll showing the
current rent and other charges and the status of
any leases.
16Business Plan
- Business Plan
- Background, education, experience of Owner
- Site Selection
- Strategy
- Revenues
- Costs/Expenses
- Projections
- Implementation
17Six Steps You Can Take to Help Ensure the Banker
Approves Your Loan
- 1) Build a relationship with your banker.
- One of the easiest ways to dramatically increase
your chances for loan approval is to build a good
relationship with a banker (or two!) before you
ask for a loan. Once a relationship is
established, the banker can help advise you on
who to contact, how to go about applying for a
loan, and provide an insider's perspective on the
process. In some cases, the banker may take a
special interest in your application and put in a
good word for you with the loan department -
which helps your application stand out from the
rest of the pile on the loan officer's desk. With
a banker willing to vouch for your character and
integrity, the loan officer may be more inclined
to approve your application. - 2) Choose a bank carefully.
- Don't just drop into the most convenient bank to
try your luck at getting a loan - do some
research first. Ask business colleagues, mentors
and others where they got a loan or do their
corporate banking. Ask if they are pleased with
the service and satisfied with the loan process. - After you get some input, call the banks that you
have heard good things about and ask what types
of loans are currently available. Banks sometimes
change the types of loans they offer, so it pays
to investigate the types of loans available
before you go to the bank. You also should
investigate the types of checking, savings, safe
deposit, credit card, and other services the bank
offers. Banks that extend a loan to you may want
to gain this business as well, and being willing
to sign up for these services may help get your
loan approved.
18Six Steps You Can Take to Help Ensure the Banker
Approves Your Loan
- 3) Try to get a personal introduction or
recommendation. - After you decide what bank to approach, try to
find someone who is a good customer of the bank
to introduce you to the banker. The introduction
can be as simple as a phone call to the banker
explaining that "I spoke to George Porge today
and suggested he contact you about your services.
He should be in today." - If possible, it is even better to have the person
offer a recommendation for you. This also can be
simple "I spoke to George Porge today and
suggested he contact you about your services.
He's a really good guy with a great new business
that I think could become a good account for you.
I told him to stop by and talk to you about
banking services that you offer before he signs
on with another bank. He should be in today." - Having a personal introduction or recommendation
alerts the bank that you are coming and allows
the banker time to prepare. More importantly,
having a recommendation from a good customer also
gives you instant credibility and makes the
banker feel more comfortable with you. -
19Six Steps You Can Take to Help Ensure the Banker
Approves Your Loan
- 4) Dress properly every time you go to the bank.
- Even though casual dress is popular in the
workplace, lenders still tend to prefer more
formal attire. Dress conservatively and cleanly
every time you go to the bank - resist the
temptation to run into the bank to drop off a
form while painting your new office. Bankers will
pay attention to you every time you go to talk to
them, and they are looking for a serious,
business-like, conservative professional to lend
money to. - 5) Be prepared for every meeting.
- You must be calm and collected for every meeting.
Do not provide all your documents at the first
meeting simply carry on a conversation by asking
about the loans that they have (although you
already have investigated this in advance).
Interview the banker without intimidating him or
her. Always look the banker in the eyes do not
look around and do not bring anything along that
would distract or annoy the banker, such as
children, pets, cellular phones, beepers or
packages. Speak honestly and softly, and be
prepared to respond to any questions that could
be asked. Have a friend or coworker quiz you
before you go to the bank so you can answer
confidently.
20Six Steps You Can Take to Help Ensure the Banker
Approves Your Loan
- 6) Invite the banker to visit you at your place
of business. - Suggest an appropriate time for the banker to
visit your office, shop or job site to show him
or her what your business is all about. This will
help convince the banker that you are serious and
will help build rapport. Make sure that the
office, shop or job site is clean (no stacks of
empty cartons, mess on the floor or food trash
lying around) and that employees are dressed
cleanly and neatly. Although this may seem like
common-sense advice, bankers deny more loans than
they approve, and most have many, many stories
about inappropriate behavior or attitudes that
discouraged them from approving a loan.