What Banks Look For
In A New Business
-- by Mike McKeever
-- http://www.redtienda.com/english/newsletter72.htm#1Banks and
institutions that lend money have a lot of
knowledge about the success rate of small
businesses. Bankers are often overly cautious in
making loans to small businesses. For that very
reason, it makes sense to study their approach,
even though it may seem discouraging at first
glance.
1.
Banker's Ideal. Bankers look for an ideal loan
applicant, who typically meets these
requirements:
- For
an existing business, a cash flow
sufficient to make the loan payments.
- For
a new business, an owner who has a track
record of profitability owning and
operating the same sort of business.
- An
owner with a sound, well thought-out
business.
- An
owner with financial reserves and
personal collateral sufficient to solve
the unexpected problems and fluctuations
that affect all businesses.
Why does
such a person need a loan, you ask? He or she
probably doesn't, which, of course, is the point.
People who lend money are most comfortable with
people so close to their ideal loan candidate
that they don't need to borrow. However, to stay
in business themselves, banks and other lenders
must lend the money deposited with them. To do
this, they must lend to at least some people
whose credit worthiness is less than perfect.
2.
Measuring Up to the Banker's Ideal
Who are
these ordinary mortals who slip through bankers'
fine screens of approval? And more to the point,
how can you qualify as one of them? Your job is
to show how your situation is similar to the
banker's ideal.
A good
bet is the person who has worked for, or
preferably managed, a successful business in the
same field as the proposed new business. For
example, if you have profitably run a clothing
store for an absentee owner for a year or two, a
lender may believe you are ready to do it on your
own. All you need is a good location, a sound
business plan and a little capital. Then, watch
out Neiman-Marcus!
Further
away from a lender's ideal is the person who has
sound experience managing one type of business,
but proposes to start one in a different field.
Let's say you ran the most profitable hot dog
stand in the Squaw Valley ski resort and now you
want to market computer software in the Silicon
Valley of California. In your favor is your
experience running a successful business. On the
negative side is the fact that computer software
marketing has no relationship to hot dog selling.
In this situation, you might be able to get a
loan if you hire people who make up for your lack
of experience. At the very least, you would need
someone with a strong software marketing
background, as well as a person with experience
managing retail sales and service businesses.
Naturally, both of those people are most
desirable if they have many years of successful
experience in the software marketing business,
preferably in California.
3. Use
the Banker's Ideal
It's
helpful to use the bankers' model in your
decision-making process. Use a skeptical attitude
as a counterweight to your optimism to get a
balanced view of your prospects. What is it that
makes you think you will be one of the minority
of small-business people who will succeed? If you
don't have some specific answers, you are in
trouble. Most new businesses fail, and the large
majority of survivors do not genuinely prosper.
Many
people start their own business because they
can't stand working for others. They don't have a
choice. They must either be boss or bum. They are
more than willing to trade security for the
chance to call the shots. They meet a good chunk
of their goals when they leave their paycheck
behind. This is fine as far as it goes, but in my
experience, the more successful small-business
people have other goals as well.
A small
distributor we know has a well thought-out
business and a sound business plan for the
future. Still, he believes that his own personal
commitment is the most important thing he has
going for him. He puts it this way: "I break
my tail to live up to the commitments I make to
my customers. If a supplier doesn't perform for
me, I'll still do everything I can to keep my
promise to my customer, even if it costs me
money." This sort of personal commitment
enables this successful business owner to make
short-term adjustments to meet his long range
goals. And while it would be an exaggeration to
say he pays this price gladly, he does pay it.
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