An Article by Arthur Washington; Edited by William A. Taylor, Esq.(The Business Lawyer)

It could be said that there is not much difference between a high performance automobile and a racecar. However, there is a difference. Conversely, it could be said that a racecar is just a high performance car geared up and modified for racing. For those of you who can’t drive, an analogy can be made between an automobile and your company’s business plan.

Business Plan as a Road Map or Financing Tool The traditional purpose of a business plan is to be a roadmap to achieve goals. However, that same business plan can be enhanced, from a lender’s perspective, to seek financing. The enhancement is possible by knowing what lenders look for in making their decisions to approve or deny loan requests.

The book, Business Plans for Financing, by Arthur Washington, can be a resource in strengthening your business plan for institutional loan requests when immediate and long term financing is an option. Institutional loans are made by banks and non-banking lending agencies that try to help small businesses. To access their money, you should start with a business plan that is enhanced to become a loan request.
Art or Science The process of making an institutional business loan is often more of an objective decision (a science) than a subjective decision (an art). There is an actual science to the process of evaluating business loan requests. That science is known as “underwriting,” which is a process conducted by a person (a financial analyst) or a computer. Either one of them is “loaded” with a lender’s guidelines that describe the type of loans the lender wants to finance.

In underwriting, the analyst matches the business described in the loan request with similar businesses in that borrower’s industry. The analyst: a) reviews the financial history and projections, and b) reviews the management in comparison with similar businesses in that industry. Also, not to be forgotten are the c) credit history and d) collateral available to secure the loan.

The process is clear-cut: generally, if a loan request falls within the lender’s underwriting guidelines the loan is approved. If the loan request does not meet those guidelines the loan is usually denied – unless other “facts” can be brought to the lender’s attention to justify the loan. Since most small businesses don’t fall within a lender’s underwriting guidelines, the trick is to develop those other facts to get your loan approved.

Who can be of Help? To help develop those “facts,” you should seek technical assistance or management assistance from someone who has actual experience in making

or evaluating business loans. A former banker will have had loan authority and can be of help. A former underwriter will have reviewed hundreds of loan requests for bankers and can be of help. They will view things differently from you and should ask questions that raise “facts” you never knew to emphasize.

To help them help you, you should make sure that the writing in the loan request proposal is clear and concise. Even more importantly, you should step back and question if the loan request is even feasible from a lender’s perspective. The lender’s perspective is to be in the business of making loans of money, not the business of making grants of money. Knowing that some percentage of loans will go bad, every loan must, therefore, come with collateral that can be easily sold to pay back the money borrowed in the event of a default. That is the lender’s perspective – with one additional factor.

Lenders Specializing in Certain Types of Loans Some lenders want to make only certain types of loans. Some lenders are seeking women borrowers, because they have historically been overlooked. Other lenders are seeking only borrowers with “good” collateral that can be easily converted into cash if sold. Others are willing to place most of their emphasis on cash flow, so that if your business turns over a lot of cash and is generally profitable, your need for collateral is greatly reduced. The borrower should be considering “What lender is a good match for this proposal?”

At the beginning of the life of a business, the best match is probably not an institutional lender. The best match is usually friends, family and spouse. This grouping generally approaches the act of business lending as an art. They generally don’t know the right business questions to ask. As the business grows, however, institutional lending will become the dominant factor.

Up from Micro to Small It is a misconception to think that most businesses start out as a small businesses. Most businesses start out as micro businesses. However, even they (the smallest of business entities) can and do require capitalization up to $25,000 to grow. That capitalization is usually equity of the owner or loans from friends and family, not lender financing.

The survivors of the micro business level become very small businesses (the next level in the growth cycle). Very small businesses can require financing of up to $100,000 to continue growing. Very small businesses grow into small businesses, which often require financing in excess of $100,000 to continue growing.

As stated earlier, business financing is more science than art. Employing technical lending insights that support your business plan (enhanced to become a loan request) should lead to success in institutional borrowing.

ABOUT THE AUTHOR: Arthur Washington can be reached by calling William A. Taylor, attorney at law, doing business as “THE BUSINESS LAWYERS.” He can be reached at (510) 893-9465

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