Helping companies do the best possible due diligence

Over several decades, hundreds of companies have come complaining to me, often in loud, hurt or mystified voices that they got turned down for a bank loan. It is still absolutely amazing to me that so many firms have little or no idea why they got turned down by the banks. Just a little bit of due diligence shows firms how they can completely reverse the equation, even getting banks to compete with each other to lend money to their firm. The rules are simple:

• Be prepared: Not only do you need to have a well-written business plan, but you also should prepare a solid loan proposal. Show the banker that you know the process they will go through to analyze your firm, and your firm’s real capabilities to pay back the loan.
• Be solid: Build a commercial credit history for your firm. Start with the easy stuff… get an office supplies company credit card, get 30-day credit from some of your vendors, lease a vehicle under the company name, etc. If your firm does not have commercial credit history, most banks turn you down just for that alone. Your firm should also show at least a decent amount of cash and retained earnings on the financial statement. Neither of these is another big red flag.
• Be respectful: Don’t insult a banker with requests they cannot fulfill. Research the banks! Savings and loans, thrifts, commercial banks… they each have a place in the business loan landscape, although commercial banks are by far the best candidates. Know which banks are the perfect candidates for your loan request. Impress them that you have taken the time to know who they are, their bank’s history, who some of their customers are, what kinds of loans and the loan structures they like to do, their bank’s financial performance, and everything else you can learn about them.
• Be there yourself: Unless your firm has made it into the middle stages of corporate evolution, with lots of revenues, lots of profits for at least several years, every principal in the firm is going to have to put their personal guaranty on the table. Consider this cast in the hardest stone. Don’t even think about arguing over this one.
• Be smart: One of my commercial banking friends put this one very succinctly: Don’t have too many toys! Stuff like boats, airplanes, and expensive cars on a personal financial statement are big red flags to a banker looking at a small business loan request.
• Be specific: Tell them exactly what kind of loan and loan structure you need. Justify each and every aspect of the loan. Show where every dollar of the loan is going. Show the benefits to your company of the loan.
• Be well-supported: Surround yourself with the best people you can find… your team, your attorneys, your accountants, your specialist consultants, your Board, and your advisors.
• Be targeted: Make sure you are making your pitch to the perfect person in the bank. Don’t embarrass yourself and the bank’s people by talking to the wrong person.
• Be humble: Don’ exaggerate a single thing. If anything, understate and under promise! For instance, put the worst case pro forma up front, the middle case next, and keep the best case pro forma back at the office.
• Be confident: Know that you are making your business successful, and that you can make this loan successful as well. Don’t brag or let your ego take control, but don’t be meek. Strike for a point a little above neutral. This is your business. You have worked hard to get to this point. You have done your homework, both on the bank and your own organization.
• Be thorough: Bring every possible document that you know ahead of time that the banker will ask for. And, when you get to the loan document stage, go over every single word. Make sure you understand everything. If you don’t understand something, ask for clarification, even ask to be educated, until you are satisfied that you know everything in the entire loan documentation package, and you can explain everything to someone else, including your Board, your team, and your shareholders.
• Be relaxed: Find a banker you can be relaxed with. Most likely, you are going to be working with this person for years.
• Be conservative: Do not act or dress flamboyantly. Tone it down. Be moderate in all your interactions with the bank and banker. For instance, when you make deposits or send a wire or for whatever reason you physically go to the bank, remember, you could meet the chairman of the board in the hallway. Every impression you make counts, and everyone will remember the most negative impression.
• Be real: Don’t be afraid to negotiate the specific terms of the loan. Don’t negotiate aggressively, but politely ask nicely if the bank can do better on each point that might be negotiable. It never hurts to ask. And, the more polite you are will be a pleasant surprise to the banker. Remember, you are building a relationship, and good relationships are solid in both directions.
  

The rules are simple. The work is not. This process will take, at minimum, several months. There are no shortcuts. I can’t count the number of people who have told me they don’t need any help, they don’t need a business plan, they don’t need this, they don’t need that, they don’t need… My response: They don’t need a bank loan either.

Charles F. Bacon, CEO & Keeper of the Vision
charlesbacon (at) superdiligence (dot) com
Due Diligence, Inc.
www. superdiligence (dot) com