In the last few weeks, I have had several different clients approach us about securing financing to expand their operations. Everyone had heard of the Credit Crunch and the doomsday stories of banks hoarding money in the vault and refusing to work with small to medium size businesses. In fact, I have had several strong companies come in who have lamented the fact that they will never get financing, and they haven’t even approached the bank yet.
After working through several of these projects in the last few months (18 to be exact), I decided to compile the six best ways to ensure your business never gets financed.
1.) Blame the Banker – It is always a good policy to blame your business banker, commercial loan officer or, more accurately, anyone who works at a bank. As with every industry, there are good and bad people. Don’t generalize that all bankers are there to turn you down for perverse joy. I’ve spent 12 years watching lenders work late, shake hands/kiss babies and try every program I throw at them to make a deal work. Most are good people trying to balance your need for money with their need to do their due diligence and keep their job. If you do get a “No”, don’t get mad, ask your banker for feedback, and take it with an open mind.
2) Blame the Bank – Because you know your banker socially, just skip on over and blame the Bank as a whole or the whole banking system. Banks are not stockpiling money. They have to lend money in order to make money – otherwise, they would have a large amount of interest bearing deposits and no interest generating loans to pay salaries. The two factors affecting your chances here are: 1) Federal Regulations are changing and making pressures for credit departments very difficult and 2) The money they loan out isn’t magic vault money – it is my checking account and your retirement savings and my kids’ college fund. If they lose it, we will all be in a heap of trouble. Instead, realize you might just have a poor banking fit.
3) Don’t pay your taxes – I have clients come in every few days who want a loan but have been legally writing off as many expenses as possible to avoid paying taxes. Here is the problem: the federal government also puts regulations on banks about loaning money to companies that are not profitable… hence your need to make sure you pay no taxes is in direct conflict with your need for financing. So, make sure to pay your taxes and accurately report your income and expenses for two to three years before you want a loan to expand. There is only so much justifiable “adding back” your lender can do.
4) Don’t plan – I know most business owners’ eyes roll back in their heads when someone says “you need a business plan”. The general idea of a plan is 300 pages in a binder on the shelf – you’ll never use it, and no one that values their time will ever read it. When most sane people say they want a plan, whether your banker, investor or advisor, it means they want a 10-20 page written document that gets all of your ideas and important information out of your head and on paper. The loan committee isn’t going to interview you for an hour to answer all of their questions – they need something to reference to help them make a decision.
5) Don’t provide proper documentation – I love it when clients say things like “I need a loan but I don’t want to give my tax returns.” Or “I don’t know where my operating agreement is, do they REALLY need that?” Well, yes, if you are asked for documentation, then they really need it. Why? Because it is part of their rules and regulations or lending requirements. The best thing to do is to put together a full package of everything that is needed before approaching your lender so you can get a faster turnaround time. I cannot tell you the number of times I’ve had a client complain about how long the process was taking before hearing from the banker that they needed a piece of documentation they had asked for twice.
6) Refuse to put up your assets as collateral – I’ve closed on a business loan, so I understand the fear of signing that paper saying your house is collateral for a business loan. There are possibly several ways to avoid it, but you will have to sign a personal guarantee either way. When clients bring this up to me in meetings, I ask them a tough question: “Are you sure this is the right move? Because if you are already worried about losing your house, you already believe you will fail, so invest your funds elsewhere.” This question gets the point across, and they realize this is a huge risk for the bank, too. And to answer your question, yes, a local bank has my house as collateral on a loan, so I practice what I preach.
This article may seem like a love letter to lenders, and maybe it is. My father was a banker in Texas and I remember so many times him agonizing over wanting to give someone a chance but being unable to. I think our local lenders get a bad wrap sometimes because people treat them like they were part of the Great Recession. Yes, sometimes they say “No” when you want them to open the vault, but many times that is the best answer you can get.
If any of the above is confusing or you want to fast track the process, please give me a call. Our office helped companies secure $124 million in loans and capital last year, and we would be happy to assist you to make the process as fast and painless as possible.