In Minor's League: May 2001

ANSWER: I sit on the board and loan committee of a community bank here in Fort Worth. We have about $400 million in assets and our target market is small- to medium-size businesses with growth potential and, obviously, borrowing needs. The situation you described is becoming increasingly common given the current soft economy.

Generally speaking, bankers are conservative, however, there is a reason for this. That reason relates to the slim margins banks operate under and the fact that just a few bad loans can mean the difference between a profitable year and a bad year.

My first suggestion is to evaluate your proposal to the bank. When you visit with a banker, prepare a professional presentation. Too many business owners underestimate the importance of this. They are accustomed to "shooting from the hip" and they think they can get by on their verbal communication skills. Sometimes this works, but you better have outstanding financials to back it up.

The presentation should include historical financial information as well as forecasts for the future. Include your budget for the next 12 months as well as three years worth of pro-forma forecasts. Prepare a business plan and make sure you are comfortable with its contents. You should be ready to defend the plan and clearly communicate why you need additional capital and what you will use it for. If you have had past credit problems or financial troubles, be sure you can provide a reasonable explanation for the problem and the remedies you have made to address these problems.

My second suggestion is to solicit funding from a variety of banks. The banking business is very competitive, and each has its own lending requirements. In addition, loan officers are very different. One may have more "clout" with the officers and loan committee members than another. One may have a lending limit that does not require committee approval while another has to get approval for just about anything. If you have done a good "sales job" and your officer feels comfortable with you, he or she will be more inclined to be your champion to the loan committee.

However, understand that many banks won’t even take a loan to the lending committee if the fundamentals don’t make sense. You have to prove that your firm has the cash flow and the financial and productive capacity to pay all debts, including the new one, out of current operations. You will have to prove that your company has adequate capital and resources to conduct its business and pay this debt if it can’t be paid out of current earnings. In addition, your collateral is critical, and the committee will closely evaluate what you are offering to cover this debt and whether it can be foreclosed on and sold or liquidated quickly.

The size of the bank and its market niche also may be a factor. Generally, large banks have decentralized their lending decisions, which has taken many discretionary decisions out of loan officers’ hands. Ask in advance how lending decisions are made. If you have an aggressive request, stay away from banks that have taken the human element out of the decision- making process.

If all else fails, evaluate other financing options. These options may include venture capital (you better have an excellent plan and great growth prospects), a factoring company, and possibly a lender that provides mezzanine financing. Small Business Administration loans are also a possibility. Educate yourself about these options and the pros and cons of each before pursuing.