Part 4 – Five Steps to Success
In this 4-part series, we’ve covered the overview of the bank lending process and the first four steps. This final installment covers the fifth and final step, pulling the whole process together for presentation to a lender and answering follow-on questions. The entire process from initial discussion with a lender to loan approval is typically 30 to 90 days.
The completeness of a loan application is vital to its success. Packaging your story and the loan application should be handled with care and considered as a major sales presentation that requires attention to details. You get one first impression so you want the document to present well. In fact, if you have a standard customer sales presentation documented, it is good to include it in the package with the loan application. Just like a customer sale, you need the lender to easily see your value proposition to your customer and they will interpret that value proposition into their analysis.
Most loan packages begin with an executive summary of your business that, as mentioned previously, leads to the details of a mini business plan. We call it “mini” because it usually won’t require as complete market analysis as an equity investor would require. Key information that needs to be spelled out succinctly in the documents includes:
- What is your market and who are your competitors
- Who are your customers and why do they buy from you versus your competitors
- How do you price, what are your gross margins and what is your market share (if you can determine)
- What is your core competency and what is your strategic advantage
- Discussion of risk factors such as customer concentration, supplier concentration, product obsolescence, changing technology, loss of key employees, changing competition and substitutes to your product
- What are your assumptions for growth of your business
- How fast could your business grow if you had unlimited capital (this sizes your upside potential)
- Trend analysis of history (number of customers, pricing changes, gross margins, inventory turns)
- Graphic presentation of historical trends connecting to forecast (line charts or bar charts)
- Documents that may support forecast assumptions added as appendices
While this may seem to be a lot of information, much of it is probably already in your head and just needs to be committed to writing. This process quantifies and monetizes your dreams for your company. This process also leads you to thinking about specific implementation steps and impediments that will need to be addressed. The more of these issues that can be put into future action steps and budgets, the more credible your story. Credible stories with detailed plans get funded because they are the most likely to succeed.
Be advised that funding will not come without strings attached. All debt has covenants and restrictions on your financial activities as protection for the lender. You must examine these carefully with your attorney and other business advisors to ascertain if you can run your business within those restrictions. It is a good practice to fit these restrictions into your three-year forecast to see if you could potentially be in breach of those covenants over time. If breach is likely or highly possible, you should discuss these scenarios with the lender to have modifications to the covenants up front or some stair-step annual changes added into the documents. This upfront analysis and dialogue with the potential lender mean your relationship will be a lot smoother down the road. Both you and the lender want a happy relationship and good planning supports that success.
C Squared Solutions provides interim or fractional CFOs, COOs, and CEO advisors in nearly all industries. We analyze and advise on these issues frequently through sophisticated modeling and experienced management. Give us a call or visit our website for more information and details. We have been there and done that!