A friend of mine is a retired banker. In his 40+ years of banking, he served as a bank president and senior banking official in a number of different financial institutions. We were talking the other day about what a banker looks for when a new business comes to try and get a loan.. As we work with many businesses, both large and small, I think his counsel is very applicable today. Here is what he told me.
First of all, the banker wants to see a business plan. He wants to see a series of pro forma statements, that look forward on how the business is expected to perform. He wants the assumptions made by you, the business owner to be realistic. This is where good market research, due diligence and careful analysis of your particular industry, competition and marketplace are important. The bank is interested in the management plan– who is going to working and running the business? For a small business, it may just be the owner and his/her spouse. However, if the business is more than a couple of individuals, what are the skills, qualifications and capabilities of each individual involved in managing the company.
The next factor the banker told me he is very interested in is how is the business going to work in the product market. What are the distribution channels, sales relationships, partnerships and allied alliances that the business owner has developed and established for this business.
Another factor that the banker wants to see is how much of your money do you have invested in this operation? Here is what is called “Skin in the game.” How much of your skin do you have invested? My banker colleague told me that the key here is that the more you have invested, the greater likelihood the banker will think favorably on your proposal.
Assuming that you have done all of this correctly, have the appropriate “Skin in the game”, the banker thinks that you have a viable proposal, he/she will then take it to the bank’s loan committee for review and approval. Now, the banker is meeting with his/her peers trying to convince the loan committee that this proposal is developed and well founded. If successful with the loan committee, the banker has received approval to grant you a loan for your operation.
My banker colleague told me that he is as interested in insuring the businesses success as you are. He wants you to be successful with your new endeavor. The banker did tell me that he is going to come visit your operation, talk with your staff and review how the business is run to insure that the business will be successful. Site visits by the banker are a good way to visit with the staff– interestingly, many things are learned through a site visit that are not revealed when in an office visit!
These ideas are salient and germane to any business owner wanting to receive bank help. Think about these carefully the next time that you are ready to go see a banker. Accomplishing all of the above listed ideas will normally result in a successful bank visit.