by Mark Sunshine, Chairman and Co-CEO of Veritas Financial Partners
Originally published on Forbes.com.
Small business owners are generally pretty terrible at applying for business loans. I know this because I am the CEO of a small business lender and I see scores of loan applications that leave me scratching my head.
Loan applicants only get one chance to make a bad first impression and, strangely, most business owners make the most of that opportunity. Making a good first impression reminds me of when my teenage daughter makes the mistake of having a boy drop by the house to impress me.
At first, things seem easy. When my daughter’s friends first get to our house they are greeted by our dogs, Kelly and Scooter. Our canine comrades almost always become instant best friends for life with anyone who gives them a treat or pets them on the head. But, while it’s easy to be liked by the dogs, that just isn’t the same as being accepted by me.
In the lending business most companies employ business development officers. They are trained to make prospective borrowers feel like part of the family. Generally, business development officers aren’t hard to impress. Often business owners are fooled into thinking that just because business development officers like them, they are getting the loan of their dreams.
Unfortunately, that just isn’t true. While getting business development officers to like you is passing the first test, it isn’t the same thing as getting credit officers to approve your loan. And, loans just aren’t made unless the senior credit officers approve.
Like the worried father of a teenage girl, credit officers are skeptical and conservative. They don’t want to make mistakes and they feel responsible for the health and welfare of their institution. However, despite popular belief to the contrary, credit officers do want to approve deals.
I know from experience that even though credit officers seem tough on the outside, they are really pretty soft on the inside and generally it’s pretty easy to make a good first impression. All the business owner has to do is appear viable, non-threatening and reasonable, and the credit officer will be ready to move the loan forward out of pure relief.
What should business owners prepare for credit folks? Below is a short list of items that should be ready to go if your objective is a good first impression.
Short description of the business. I can’t tell you how many times I have received all sorts of information about a borrower, but had no idea what they did or who their customers were. The business description should include short sections describing products and services, customers, competition, history, management, and ownership. The business description doesn’t have to be long or complicated. A good test of whether or not the business description works is to give it to a high school junior, and see if after reading the description the 17 year old can describe the business to his or her friends. If a 17 year old “gets it” you’re on the right track.
Historical financial statements. Three years of historical financial statements and year to date financials including actual to budget and actual to prior year should be presented. At best, the historical financial statements will have been either audited or reviewed by an independent accountant. Resist the temptation to provide complicated consolidating and combining statements with column after column of entries. It’s a turn off. The financial statements need to tell a simple story so that the credit staff can quickly calculate EBITDA, tangible equity, debt to equity, fixed charge coverage, quick ratios, and liquidation values from the sale or collection of assets. It’s even better if you calculate these numbers and ratios for the lender before being asked.
Projections and budgets. While the past is important, the future is more important. Projections should be easy to understand and should be presented on the same basis and using the same line items as the historical financial statements. In 5 minutes or less a reader should be able to determine that the applicant will be able to pay its debts when due and expect to have adequate cash flow and collateral to operate for at least 24 months. Unsubstantiated forecast sales and/or margin improvements are bad. Personally, when I receive unrealistic projections it makes me feel like my daughter just brought home a boy with tattoos and piercings all over his body.
Schedule of off balance sheet assets and liabilities, including contingencies. Everyone wants to know what isn’t captured by GAAP. Make it easy for the lender and just tell them. They will find it out sooner or later anyway.
Accounts receivable, accounts payable and inventory agings. I really hate it when a prospective borrower either doesn’t give us this information or gives us 30 pages of detail and thinks information overload is OK. Either alternative is bad. The agings should be in a summary format with supplemental detail on the top 10 customers, vendors and inventory categories.
Schedule of fixed assets. Once again, a 30 page schedule makes a bad first impression. However, a summary schedule, by major type or item is important. The schedule should have the following information, original cost and acquisition date, accumulated depreciation, net book value, net estimated orderly liquidation value, net estimated market value and, when appropriate, tax appraisers value.
Tax returns. Tax returns are important because they validate the reasonableness of financial statements and projections. However, too many borrowers think tax returns are the same as financial statements; they aren’t. It shouldn’t be a surprise for anyone to learn that the tax code is really complicated and lenders aren’t tax experts. Much of what is in a 300 page business tax return is undecipherable and meaningless to credit officers. If you want to make a good first impression, more is less and less is more when talking about presenting tax returns.
Reporting to current lender. Any sort of periodic reporting to a current lender should be provided before being asked. Also, the borrower should know what they are going to say when they tell the existing lender they want to replace it.
Personal financial statements. The business owners and key members of executive management should provide personal financial statements. Prudent lenders will require this information and it makes a much better first impression if the information is provided without being asked. After all, no one wants to lend to a company with a management team that can’t manage their personal life.
Any “bad” information about the borrower, the shareholders, management or otherwise. Pretty much all lenders have access to data bases that provide “instant background checks” on people and businesses. So, if there is something bad to disclose don’t wait until the lender finds it. Get it out on the table up front.
After giving all that information to a prospective lender, how do you know if you are making a good first impression? It’s easy, you are invited back. If the credit officer says he likes your company, or at least doesn’t say he doesn’t like your company, you’ve done your job. Congratulations, you haven’t been knocked out of the lending queue because of a bad first impression. It’s time to work on loan terms and detailed underwriting.
While it may seem like making a good first impression is hard, I can tell you from experience there is still time to have your loan rejected. After all, the opportunity to make a second impression is just around the corner.