As the owner of a growing business, you will make many important decisions, but perhaps none as important as funding your capital needs. In an ideal world, you could just dip into your bottomless cash reserves to properly fund your business. However, in reality, most business owners will need to meet with a bank.

When small businesses make loan requests, there are two common mistakes that are made: being underprepared and being unable to justify the need.

PREPARATION SPEAKS VOLUMES

Visiting your banker is similar to finding a good business partner. You each need to sell one another on why you’d be a great person to do business with. In order to accomplish this, preparation is critical.

Whether your business is a startup or a 50-year-old company, the preparation should be the same. You need to help the banker understand the history of your company and where you are going.

Showing where you have been is pretty straightforward in that you should provide multiple years of historical financial statements (primarily income statement and balance sheet). Providing more than one year helps the banker to understand trends in the business, such as if your revenues are trending upward or downward or if your margins are improving or tightening. It is also best to provide your banker with a summary of changes that can be noted on the financial statements from year to year.

Showing where your business is headed will help your banker to understand not only your strategic vision, but ultimately why and how the loan will allow your business to reach its destination. The primary tool for this is detailed pro-forma financial statements. A pro-forma financial statement is nothing more than your income statement projected over a period in the future.

For startup companies, banks like to see multiple years of projections, but for an existing company, a 12-month projection will help them understand where you expect to take the company. Be sure to explain in detail any assumptions you made so your banker can understand why you expect revenues and expenses to be
at certain levels.

JUSTIFY THE NEED

If the loan request is for a fixed asset purchase, your goal should be to justify how the new equipment or real estate will allow you to better and more efficiently provide for your clients. If it is a working capital loan request, the projections should reflect how having a working capital line will allow you to more aggressively pursue and facilitate new sales opportunities.

Proving to the bank you’ve done your homework and that you truly understand the capital needs of your business will enable your banker to feel confident in your ability to profitably grow your business. Bankers are people just like you, and they do not want a business owner to feel intimidated. Good bankers truly desire to get to know their client and develop a relationship based on mutual trust. Bankers want your business as much as you want a loan. They are not looking for ways to deny you—they simply have underwriting guidelines they must follow for everyone’s benefit.

Look for a bank that aspires to be your partner, someone you can call whenever you have a financial question or need. A trusted relationship makes all the difference.