As the economy starts to show signs of recovery, many business owners — including dentists — are looking to expand and perhaps add to their staffs. They can increase their chances of obtaining a small business loan by being prepared and understanding what their lender will be looking for when they review the loan package.
An introduction letter will set the business apart from other loan applications. It gives the lender information about the story of the business, the management team and their expertise in the industry, what the business does, who are their customers, their competitors, and how they plan to use the loan. This takes the loan package from an exercise of “crunching the numbers” to enrolling the lender into the business owner’s vision.
The Five C’s of Credit
This is a method lenders utilize when determining the credit worthiness of potential borrowers. This method looks at five characteristics of the borrower as follows:
Character: The bank looks at the company and the owner’s reputation, and the honesty with which they complete their loan application package. When filling out a loan application, every blank should be filled out. Leaving blank spaces might give the impression that there is something being hidden. lf it’s not applicable to the business, it is best to put “N/A,” rather than leaving blank spaces. Recommendation letters from key customers will also set the business apart.
Capacity: This measures the borrower’s ability to pay the loan, given the company’s recurring debt. Some lenders call this “leverage.” This includes any recurring payments currently utilized to service a debt obligation. These do not include payments that can be canceled at the payer’s request, like newspaper or magazine subscriptions. Normally the lender will look for your total (combined personal and business) cash out-flow to be no more than 40 percent of the cash in-flow.
Capital: The lender will look at the initial capital investment the borrower made to the business. Additionally, how much capital s the borrower willing to put toward a potential investment and how much owner’s equity is in the business. If the borrower is investing in their own company, the bank is more willing to invest with the borrower. Collateral The lender will look at what other sources of re-payment the business will have if the cash flow is no longer in place. Lenders will take into consideration real estate, stocks and bonds, cash and accounts receivable. Conditions Environmental conditions play a key role in the decision. During the heart of the recession, banks look for recession-proof businesses like automobile repair shops and some professional industries like medical offices.
Just like a builder utilizes a blueprint to build a structure, and a traveler uses a roadmap to get to their destination, so business owner must use a well thought out business plan to dramatically increase their odds of succeeding as an entrepreneur. When presenting a loan package to a lender, an organized, well thought out business plan can make the difference between getting the loan and getting a decline letter in the mail. A business plan will show the lender:
• lf the business has a chance of making a profit and in what amount of time.
• Provide a well thought-out estimate of how much the business needs to grow.
• Convince the lender to fund your business.
• Define the business market, the customers, and the percentage of the market the business plans to reach, hereby providing a clear revenue estimate.
• Show the lender any anticipated potential issues, and how the borrower plans to address them. Writing the business plan ln today’s electronic environment it is not as tough to write a business plan as one might think. Simply search the Internet for “Business Plans;” there are many vendors that for under $20 will walk you through putting together a well-thought out, comprehensive business plan.
A final note for start-ups — business owners can greatly increase their chances of successfully securing a loan by being prepared and establishing a strong relationship with the bank before they need to borrow. As Scott Monson, EVP, regional executive director for California Bank & Trust said, “By introducing yourself and your business to your banker early on, you can build a foundation upon which the banker can later draw to make a determination about a loan. The bank may not be able to supply all the funding you need for every situation, but they will always be a cornerstone for your daily operations and financial stability.”
Betty Rengifo Uribe is president of Hispanic Outreach Taskforce. During her 25 year career in the financial services industry, Rengifo Uribe has held senior level positions in retail banking, business banking, and strategic planning. Most recently she joined California Bank & Trust as executive vice president leading the Business and Personal Banking Division; overseeing 66 branches and multiple business lending teams throughout the State. (www.calbanktrust.com). She has owned and managed three businesses herself, so she has employed that entrepreneurial vision in her work life.