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If You Need a Loan, Give Good Answers to These 4 Questions
by Alex Goumakos, CPA



Too many small business owners waste their time and effort filling out loan applications, submitting proposals and reaching out to numerous potential lenders and investors when in reality, they're not really in a position yet to get what they're asking for.

For example, last month four small business owners I know (none of them clients) asked me to either invest money in their company or to introduce them to a few bankers and investors I know.

I try to help as many people as I can. But after asking four simple questions, I had to respectfully say "no" to three of them.

Here are the questions I asked:

QUESTION #1 - How's your personal financial situation?

If you own a relatively new business (under three years old) and it doesn't have substantial earnings or unencumbered assets a lender wants, be prepared for the focus to shift to your personal assets and credit history.

No lender or investor is going make a loan or invest money in a new company that doesn't have either a decent earnings record or valuable assets it can pledge as collateral.

The good news is, not all lenders and investors are stringent when it comes to your personal credit and financial condition. In today's world, millions of people get loans even with poor credit and negligible assets.

Of course, if you manage to find a lender or investor willing to work with your less-than-exemplary personal financial situation, expect to pay dearly in the form of high interest expense, commitment fees, loss of ownership percentage and/or financial and operating restrictions.

If you can wait it out, definitely take the time to improve your credit BEFORE applying for a loan.

Bad credit can be fixed. One new businesswoman I know had several charge-offs on her credit. She managed to get them all deleted within 12 months simply by sending dispute letters to the credit reporting agencies and collection agencies.

While this won't necessarily work for everybody, you'd be surprised at what you can achieve by taking the time and effort to fix your credit.

The alternative to bad credit of course, is to find a co-signor for a loan. I know this is easier said than done, but you'll increase your chances of getting a co-signor if you can adequately answer the remaining three questions.

Also, consider sweetening the deal for a potential co-signor by offering them either a small ownership interest or a financial reward for their commitment and signature.

Incidentally, two of the four small business owners who asked me to help them had in fact new businesses, no major assets and less-than-perfect personal credit.

QUESTION #2 - What do you need the money for?

When applying for a loan, be prepared to provide exact and explicit details as to why you need the money. If you can't provide an adequate reason, or if your request is vague or speculative in any way, you won't stand a chance - even with good credit.

Quantify the reasons why you need a loan. Instead of saying, "I need the money for working capital or to pay bills" say, "I need $25,000 to renovate our showroom so that we can accommodate additional customers and increase our sales by $125,000 per year. Here's how the loan will help me achieve this goal..."

And whatever you do, don't say that you need the money because of mistakes caused by partners, employees, vendors or anybody else. Nothing will turn off a lender or investor quicker than if you start bitching about a partner or employee who took too much money or who didn't pay the bills he or she was supposed to.

Lenders and investors like stability. Besides, if you start blaming others for your company's predicament, you are in effect, undermining your own managerial ability. If lenders sense you're a poor manager, your loan request will be disqualified.

Surprisingly, two of the small business owners who asked for my help couldn't give me a valid and explicit purpose as to why they needed the money.

In today's lending environment, "to pay the bills" is not a good enough reason.

QUESTION #3 - Do you have a business plan?

When I asked this question, three of the four small business owners said no. One owner even boldly told me he doesn't have the time to put one together.

The fact is, many small business owners (even some highly successful ones) don't have business plans.

However, if you're seriously looking for money, a business plan is a requirement, not an option.

A business plan does not have to be complicated. But at a minimum, it should contain the following information:

* The Basic Elements including business description, management, target market, customers, competition, positioning, distribution and marketing.

* Financial Information including current financial statements (balance sheet and income statement), income tax returns, forecasts and anticipated cash flows. Some lenders or investors may want to see personal information as well.

Whatever you do don't go overboard on your business plan because not everybody will take the time to read all of it. Instead, focus on the executive summary and your financial data.

QUESTION #4 - Do you have any problems paying the bills?

Lenders and investors don't like to hear that a company can't pay its bills (especially if taxes and trade accounts are involved).

Of all the criteria used to determine a company's eligibility for a loan - LIQUIDITY - a company's ability to pay its bills when they become due - is one of the most important.

Here are some other highly important financial criteria that lenders and investors will be taking a close look at:

* CONSISTENT PROFITABILITY - One of the first things a lender will do is determine if your company can pay back the loan. If your company can't support repayment of the loan, you won't get it, period.

* FINANCIAL HEALTH - The principle method used to measure financial health is the debt-to-equity ratio (total debt divided by total equity). The traditional standard limit is 2 to 1. A lower limit indicates a greater level of overall health, while a higher ratio will easily disqualify you from a loan

* COMPARATIVE INDUSTRY DATA - Your company's financial information will be compared to others just like it in the same industry. If there are major differences between your financial data and the data of other comparable companies, be prepared to explain the reasons why.

When I probed the small business owners about whether they had any trouble paying their bills, only one said no emphatically. The others gave me the distinct feeling that their money woes were signs of deeper rooted issues.

If there are severe and chronic cash shortages in your company, you need to find the underlying reasons why. Don't wait for a lender or investor to find out for you. While nobody likes to admit defeat, throwing money at a recurring problem is like committing business suicide. In other words, you should know when it's time to cut your losses.

Keep in mind that no amount of money will solve the following problems:

* a bad business concept
* an incorrect price
* poor customer service
* mismanagement
* a bad location
* lack of a strong competitive advantage
* an owner who doesn't have his or her personal finances under control

If you need money, it's important that you make a good impression by putting your company in the best possible financial light. To do this, you need to make sure you:

1. Have good personal credit or can get a co-signor who does.

2. Can explain in exact details how you intend on using the money.

3. Have a business plan with all required financial information

4. Can show you have a profitable company that can pay its bills when they're due

Copyright 2004 Alex Goumakos, CPA