Too often, aspiring local business entrepreneurs are turned away in frustration after meeting with a local banker because they didn’t fully prepare for them. They make critical mistakes that, with only a little preparation, could have been avoided. This post is going to talk about such preparation.
Let’s say you’re set to meet with some local bankers next week to discuss financing for your local business startup. The first step is to understand their incentives and motivation before you meet with them.
Lender Incentives
Incentives of Commercial Bankers. These bankers are rewarded by making loans. They are looking for quality loan applicants, and if they feel like you’re loan will be approved by the underwriters he’ll send your package to, you’ll see a lot of enthusiasm on his end. At the end of the day, most commercial banks aren’t making loans to startups, but if they do, they pay closer attention to collateral than business plans.
Incentives of Community Lenders. These loan officers working for nonprofits usually aren’t paid as highly as their commercial bank brethren but are driven more from mission than profit. While many community loan officers are encouraged to make lots of loans, most of them aren’t financially rewarded for making more. Traditionally, you’ll see more risk-aversion tendencies because they’re afraid of losing their job if they make lots of bad loans (that default). So while the commercial bankers are thinking, “how can I make this loan”, the community lender is thinking, “How will this loan come back and bite me”.
How you should present your idea
Start with a 30 second pitch. This pitch will include how much money you need, how much money you’re putting in yourself, what you’re doing with the money, and what you expect in sales in the first year. Be prepared to answer follow up questions like, “Who is your customer,” “Who’s your competition”, “How are you going to market”, and “when will you breakeven”.
What you should bring
Have your business plan ready, complete with financial projections. Make sure you’re projections are consistent with numbers in your narrative. Lenders will use your projections to crunch a model to determine if you’ll be able to repay the loan. Also bring 3 months of bank statements (to show that you are liquid and have cash for the business/loan), a completed Personal Fianancial Statement (like a personal Balance Sheet), and be prepared for them to run your credit report.
Dress
Obviously dress professionally! You want the focus on your business, not your attire. Easy on the cologne, perfume, and makeup.
The Truth
Do not stretch the truth in any way. You’ll be asked for documents that will be reveal exactly what’s going on with both your business and your personal finances. If you’re credit isn’t great but you say it is, your credit report will reveal the truth quickly. If you say you’re putting $10,000 of your own cash but your bank only has $2,500–again, the lender won’t look upon your application positively. Lastly, don’t project grandiose sales projections. Most loan officers have seen hundreds if not thousands of business plans and can spot BS a mile away. Transparency gets financing, not big numbers.
Your first is the hardest
Like everything in life, the first is the hardest to secure. Don’t get discouraged if you get negative feedback at first. Bankers want to see people who have repaid loans before–it makes them feel like their risk is mitigated. Keep on trying.
