|
Getting your first biz loan
|
 |
October 15, 1997: 2:31 p.m. ET
Bankers: We look for a business plan, experience -- and your own money
|
NEW YORK (CNNfn) -- What does it take to get your first small-business loan?
Bankers say the successful applicant knows the market for his or her business, knows what all materials and services will cost -- and has some backup funds for when things get tight.
"Bankers always want to see how much in reserves (applicants) have got, (and) how much experience they've had," said Francis Thorne, a former board member at Lansing State Bank in Lansing, Kan.
Thorne said many bankers also want to see a five-year business plan, and "want to know what (applicants are) going to fall back on if they get in trouble. Are they gonna call mom and dad, or do they have some stocks and bonds somewhere?"
Banks also prefer to share the risk, rather than shoulder it altogether.
Bankers say an applicant willing to risk a considerable portion of his or her own money stands a better chance of getting a loan application approved.
"An important consideration is the amount of capital that will be contributed by the owners," said Bill Terry, senior vice president of TrustCo Bank in Schenectady, N.Y.
Ken Janasz found that out when he opened Ken's Comics and Magazine Junction in Leavenworth, Kan., in 1989.
Janasz wanted to borrow $30,000, but his bank would only loan him $15,000 -- essentially matching the amount Janasz had stashed away in savings and profit sharing from his former job at Wal-Mart.
"If you can come up with half of the total amount you're wanting, your odds of getting a loan are a whole lot better," Janasz said. "I didn't get all of what I wanted, but I convinced them enough to give me a little because I was willing to put up a portion of my own money."
TrustCo Bank's Terry said lenders will write small-business loans that allow entrepreneurs to acquire real estate, purchase equipment and startup inventory and pay operational bills in a business' fledgling months.
"Commercial banks are focused on meeting those needs, as opposed to loans that are (sought) to take the place of capital," he said. "Loans that would allow the owner to withdraw capital from the company are generally avoided. If the business has peaks and valleys, the loan should be paid out in accordance with that cycle."
Terry suggests would-be borrowers get a basic understanding of income projections and balance sheets as part of the application process.
"It's certainly helpful to have a professional provide you with those," he said. "If a person wanting to start a business has a three-legged support system of a banker, a lawyer and an accountant, ideally if those three work in concert, the new business has a higher chance of being a success."
Experts say a realistic understanding of the business world is also crucial.
Thorne noted that in Lasing State Bank's home base of Leavenworth/Lansing, Kan. -- an area that hosts a large military base -- retired military officers have often been poor business-loan risks.
"They've had a great career in the military, they have all sorts of degrees, but they've never been in a business atmosphere," Thorne said. "They've lived in a world of unlimited budget. ... a world of 'Do as I say and don't answer me back!' First time a customer comes in and starts chewing on them, they can hardly stand it."
By contrast, Janasz said his seven years of work at Wal-Mart gave him invaluable experience he tapped into while drafting his business plan.
"I went to the bank with a list of the stuff I needed to buy, like fixtures and inventory," the entrepreneur said. "I had a list of projected sales and income. I had a business plan on what money was going to be coming in and what was going out. I had a list of all the product lines I was going to carry, and a gross profit margin on each category."
Thorne said such business experience "makes all of the difference" in winning loan approval.
He said banks want to see not only job experience related to the business, but also a stable work history. Thorne explained that banks could perceive job hoppers as unfocused and incapable of committing to one business.
A credit history marred by delinquent payments will also require an explanation. Don't presume the delinquencies won't show up; they probably will.
"Many people don't realize that there's a great big computer in the sky that they can't hide from," Thorne said. "We can plug their Social Security number in there and find out they were two months late on a student loan, or that they're behind in their alimony payments. It's a character thing. We don't like to see real late payments on a credit check."
Experts say applicants should also expect to have detailed discussions with a prospective lender about local market conditions, as well as specifics of the would-be entrepreneur's business plan.
Terry said these discussions help lenders get a feel for how the applicant plans to run the business, and gives lenders a chance to "contribute some constructive advice.
"Sometimes a conversation with borrowers will reveal whether or not (applicants) have thought out the endeavor upon which they are embarking," he said. "Sometimes it becomes clear that a dose of reality is needed."
If all of this sounds hard, experts say entrepreneurs should remember that in the banking world, familiarity breeds contentment -- not contempt.
Janasz said he had a much easier time securing a follow-up loan from his bank than he did the first time around.
"A few years after I paid the first loan off, I needed a small loan to buy up some inventory for Christmas, so I got a $6,000 loan," he said. "That one was very easy to get."
-- Margaret Nowak
|
|
|
|
|
 |
|
