P R O F E S S I O N A L . . . C O N T R O L L E R S
What to Know about Business Loans ©
1997
by Adrian W. Hollander, C.P.A., CISA,
CIA, CBA, CFSA,
President of COMPLUS Inc. – Professional Controllers
Myth -- It takes money to make money. There are three ways to get money for a business: equity, debt, and revenue. Investors want to share the fruits of your labor. Since they can lose all their money, they reasonably expect a larger reward for a big risk. Lenders want a guaranteed return for the use of their money. For less risk they will accept a smaller return. Customers want their money's worth in product or service. Sometimes you can persuade a customer to prepay all or part of what he will pay in order to fund production. Sometimes you can persuade vendors to give you extended payment terms. Sometimes you can persuade employees to work for lower wages at the beginning in exchange for deferred (bonus) compensation when the business can afford it. The more ways you can find ways to pay others after you get paid, the more you can be "in control."
Lenders should test your character, capacity, collateral. Your "collateral" is what the banker may take if you do not repay the loan. Your "capacity" is the potential for the business to earn the money to repay the loan. Your "character" is measured by the banker's confidence that YOU will keep your promise.
You should want a loan, rather than need a loan. "Need" implies that you have not used the assets you have very well. What went wrong to put you in this situation? How will lending you more money change the situation? The lender sees himself as bailing you out of trouble, or worse just postponing the inevitable. Most lenders do not want to lend to people who need it. "Want," on the other hand, implies that with the lender's money you can afford to do something which is otherwise not possible (buy a new building or machinery, add promotion or distribution activities, attract more talented personnel). The lender is investing in an opportunity that should produce positive cash flow over the life of the loan.
It's what you know AND who you know that counts. Talk to potential lenders early in the process. Ask each about their requirements and approval process. There are many similarities, but each will probably be a little different. Without necessarily divulging any really confidential information, ask several lenders about their interest in "investing" in your business project. Bankers seem to resist bringing ideas to the table. They seem to be more comfortable receiving proposals than making proposals. Investing large amounts of time (and money) in developing and documenting a project that bankers will not support will be very frustrating (besides being very expensive). If the project may be very difficult to fund, consider using loan brokers or consultants who work on a contingent fee rather than by the hour.
Lenders don't want to foreclose on collateral. They are in business to loan money not to broker the sale of other assets. Lenders' collection activities may sometimes seem offensive to us, but are really just defensive. Demanding a pledge of collateral is primarily to encourage a borrower to repay willingly.
The government is not your friend. The "third" on my list of the greatest lies is "I'm from the government, and I'm here to help you." Despite the number of government loan guarantee programs, tax deferral or abatement incentives, and "set-aside" preference programs, BE CAREFUL! When you go into business, you will go into two businesses. One is the business you planned; the other is being an agent for (or victim of) the government. The most obvious activity is tax collection. From 10% to almost 30%, depending upon your type of business, of your gross revenues will be paid to the government in taxes. Payroll tax payments (to IRS, Social Security, State Departments of Revenue) alone will amount to almost 1/2 of what you and your employees see as net pay. In many other ways the government will regulate the way you do business. The government (U.S. and State Departments of Labor, EEOC) may attempt to tell you who you must hire, or not fire. Most of what unions won by collective bargaining (Fair Labor Standards) has been enacted into statute for the benefit of all workers. The government (OSHA, EPA) may impose work rules upon your operation. The government (FDA, Consumer Protection Agency) may impose rules about the content of your product. Consider as well the laws that enable customers, employees, and bystanders to sue you for virtually any unfavorable result. The more money (grants, loans or loan guarantees) you accept from governmental sources, the more intervention you should expect.
Your business plan is what documents your sales presentation for the loan. Large companies call this document a prospectus. It should describe your business: past, present, and future. Lenders expect optimism and respect realism. Disclose the risks and tell how you will deal with them. Tell your potential lender how (and when) you plan to repay him. Cash flow projection is more important than income projection when talking to a lender. Document your assumptions. Neatness counts.
Your lender should expect you to know how your business is working. Your management team should include leaders for sales, production and administration who help you to be "in control." The people with whom you surround yourself will tell your potential lenders a lot about you. The credentials of your accountant may be among the most important indicators of your character to a lender because they tell how much you care about understanding your business. Your customers, especially, should appreciate your attention to detail. The accounting system is the set of processes that enable you to run your business without feeling blindfolded. You will always pay for good accounting, one way or another.
The "golden rule" -- he who has the gold makes the rules. Expect your lender to look over your shoulder, and give you advice. KEEP YOUR LENDER INFORMED. Trust is very hard for you to earn, and very easy to lose. Your lender expects you to lose all of your own money -- before you lose any of his. To rid yourself of a meddling lender, repay the loan.
If you want a "bad" loan, go to a lender who makes bad loans. Lenders, be wary of the borrower who does not ask much about the terms for a loan. Terms are not very important to a borrower who doesn't intend to pay the loan back.
send e-mail to: AHollan700@aol.com