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by Jim Martyka For many small businesses, a bank loan can make or break a dream. Officials at banks of all sizes say they see these dreams presented every day, and every day they need to decide who gets money and who is sent away. It’s not easy to make that decision, but banking — like any other business — is about making the right deals.
“There has to be a good reason why we would be willing to lend thousands of dollars to a company, right?” says Richard Weller, vice president of commercial loans for Eagle Valley Bank. “We need to see a concept that is going to succeed, one we can help succeed. Those are the businesses we want to work with.”
It doesn’t matter what the money is for, whether it’s for an individual looking to start a business, a small business looking to beef up its technology and operations, or a growing company looking for capital to help with expansion. The same rules apply for all businesses when trying to work a relationship with a bank and to make that relationship prosperous.
There are certain steps that need to be taken, certain things the bank needs to see and the small-business owner needs to prepare. In fact, that’s the No. 1 piece of advice bankers, small businesses and industry experts alike have for getting a loan.
“It’s about preparation,” says John Thwing, a vice president at Wells Fargo, who is more commonly known as The SBA Guy. “You need to be prepared, to have all your ducks in a row and be ready to sell us on the idea. Preparation is so important.”
More specifically, that means being prepared with a business plan, specific details of what the money is needed for, exact plans for using the money, how the bank will be paid back, personal financial records, company history, collateral, projections — anything that will show the bank that the small business is ready to make the most out of the money lent.
Just as it is for a start-up company, an existing business needs to present a detailed plan for why the money is needed. The most important part of the business plan is the executive summary section, as that is where a small-business owner will sum up everything that would attract a banker. Plus, it’s often what bankers will look at first.
“The business plan is the deciding factor more often than not as to whether a company will get financial support,” Thwing says. “There have been cases of business owners without much experience who have put together an impressive plan and gotten a loan at a good rate, based on the plan itself.”
And then there are other business owners that have cost themselves funding by not preparing a solid enough plan. Bankers want to see focus, not plans that are all over the place, and specifics, not vague and optimistic projections. Business owners who have been rejected for loans advise others to listen hard for the reasons. If the same objection comes up twice, work hard to address it.
Realize a simple truth: The banker’s job is to approve only those loans that will get paid back. If you show how you’ll make the payments, you’ll be ahead of the game.
Drafting a plan
Since the business plan is often considered the most important piece of the sell, it can be intimidating for small businesses with limited or no experience to draft one. There are organizations that can help, including local branches of SCORE, the Small Business Development Center at the University of St. Thomas and a number of attorneys who specialize in helping business owners draft plans.
Focus is integral to a solid plan. Several experts say they often see plans that involve grandiose dreams for the next project and beyond. And while they appreciate an ambitious business owner who’s thinking ahead, they don’t want to see someone who’s going in six different directions at once.
The key is to know exactly what the money will go for and revolve a plan around it. “You need to have a clear vision of what you’re trying to accomplish,” Weller says. “Until you do, we can’t help you.”
There are no cookie-cutter packages, he says. Rather, each case is looked at individually and clear, well-defined goals go a long way in getting not just the loan, but also the attention and support of the bank. Focus will help the banking partner structure an appropriate loan to fit particular needs.
In general, bank loans come in three forms. Short-term loans are typically used for a business to start operations and have terms of usually a year or less. Intermediate loans usually last one to three years and are typically used for equipment expenses. Long-term loans last up to seven years or more and are used for the bigger expenses, such as expansion plans, commercial mortgages or heavy equipment.
As part of the structure of the loan, the banks may include varying interest rates, fees, deposit requirements and other more specific costs based on the plan and the nature of the request. The message is be flexible and understand that no two loans are the same, just like no two banks are the same.
Another important tip is to work hard to find the right banking partner. Every bank is different, just like every small business is different. Business owners need to work with somebody who is excited about working with them.
This is where the debate over a small community bank touting a more personal touch versus a big bank touting more resources comes into play. It’s important that a small business explore multiple loan opportunities to find out what relationship and situation works best for that particular business.
“You need to go in and feel like they’re on board with you,” says Guy Gunner, owner of Gunner’s Garage in Apple Valley. Gunner borrowed a low- six-figure loan from Eagle Valley Bank to help boost his automotive repair shop. “It’s just as important that you feel comfortable with the bank as it is for the bank to feel comfortable with you.”
Says the U’s Mark Bergen: “It’s important that no matter what you need to do, you get the help to do it.” He’s a professor of business education at the University of Minnesota’s Carlson School of Management. “The resources are out there and there are people willing to help you build your business, so it’s really up to you to do your research, figure out who you can work with and get done what you need to get done.”
Referrals count
When that happens, providing strong referrals is an impressive first step in the process. Not all banks require referrals, but they certainly help. Referrals and a “meaty” business plan had banks competing to work with the new owners of Blaine-based Designer Sign Systems.
“I’m a networker and I called everyone for a referral and then made sure we all had a profitable story to tell,” says Sally Macut, president and co-owner of the firm. Macut and her business partner, Kathy Brown Zerwas, bought the business in April with the help of a loan in the $3 million range from 21st Century Bank.
“For that big of a loan, we had to show them what we were capable of. Our business plan was pretty and full of meat in each section. That, plus the numerous referrals that were available, really helped us,” Macut says.
Another important factor is financial records. This includes tax returns, earnings statements and any other financial records for not just the company, but also for the key personnel.
“To us, it’s two sides of the same coin,” Thwing says. “The business is the people involved in running it. So we need to know everything about them.”
Thwing said he works with about 20 businesses at any given time, and availability and honesty in personal finances make a huge difference. This is an area that can sometime hurt small-business owners, especially if they have a shaky credit history. Bankers advise honesty, saying that they understand the difficulties of running a business. More often than not, something can be worked out.
Another move attractive to bankers is when owners invest some of their own money into the project. A good number, according to experts, is about 25 percent of the total capital needed for a project. If a small business can put down any money, it shows that the owners aren’t simply looking for a handout.
It’s also easier for bankers to lend money to a small business that is investing the money into assets, such as inventory or equipment or anything else that is used to generate income.
“We like to see that the money is being invested wisely,” says Rick Wall, CEO of Highland Bank, based in St. Paul. “That needs to be shown to us in the plan.”
But the presentation isn’t only about the plan. Bankers say they look for a lot more in an initial meeting than simply what’s on the paper. They also look at body language, posture, whether or not the applicant is looking them in the eye and a number of other little “tells.”
“Many of us have been in this business for a long time and we can read certain things,” Weller says. “By reading how they physically pitch their plan, we can often tell how confident they are, how prepared they are and what they’re actually going to do with the money.”
Some simple tips for the physical presentation include a firm handshake, eye contact, showing up on time, dressing professionally, and a calm, clear, focused presentation with the ability to answer questions at the end.
Another tip is being able to get any additional info needed immediately after the meeting.
“It’s important to see how prepared the company can be for anything that might come up,” Wall says.
The last piece of advice experts had was to shoot high. Bankers say they are amazed at how tentative small-business owners are when asking for money (especially in the Midwest).
“Shoot high, absolutely,” Thwing says. “Look, it’s always easier to come down from too high a number than it is to go back and secure more money after the terms of the loan have already been set. That can be a mess for everyone involved. Figure out what you need, prepare and come in with a strong plan. Chances are something can get worked out.”
[contact] Mark Bergen, University of Minnesota’s Carlson School of Management: 612.624.1821, mb*****@******mn.edu. Guy Gunner, Gunner’s Garage: 952.891.5393; gu***********@*********et.net. Sally Macut, Designer Sign Systems: 763.784.5858; sa*********@**********gn.com. John Thwing, Wells Fargo: 612.316.2501; sb****@********go.com. Rick Wall, Highland Bank: 952.858.4753; ri*******@***********ks.com. Richard Weller; Eagle Valley Bank: 952.431.0171; eaglevalleybank.com
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