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What Lenders Look For
Don't go looking for money until you can answer these questions.
Lenders and investors ask the same seven questions, so when approaching either, build your answers into the first few minutes of your presentation. Be prepared with specifics for each answer.
1. How much money do you want?
Give an exact amount up front with no delay. A precise answer shows you are prepared and organized.
2. What will you do with the money?
List the equipment prices you will pay, planned expenditures for research and development, the anticipated growth in your receivables or inventory, old debts you are consolidating or salaries for additions to your sales force. Don't worry about giving too much information.
3. Why do you need our money? In this disguised, two-part question, you should answer whether you have a problem or an opportunity.
To finance a problem — such as declining profit margins, slow-turning inventory or late-paying customers — you must provide a credible solution.
An acquisition, a large contract, new products, growing market share, new cost-saving equipment or a more efficient office layout can be opportunities.
You should be prepared to provide responses for the following subset of topics: Is your business profitable? Do you have down payment money for a purchase? Are you paying excessive salary and expenses? What is the trend of profit growth and reinvestment?
4. How will this funding benefit your business?
You take on loans and financial investments to produce profits, create asset growth, generate funds for repayment and leverage new wealth.
Demonstrate how the funds will reduce costs, produce efficiencies or increase capacities with new equipment or warehouse space. Show how marketing campaigns or viable new products emerging from research and development will accelerate sales growth.
Can you justify debt consolidation with improvements in cash flow? Or can you present new opportunities and directions stemming from an equity buyout?
5. How will you pay us back?
This inquiry is the most important of the seven questions. For the lender, the winning answer is: "... with excess cash flow from profitable operations." Funds from other creditors or a future equity injection come in as distant second and third responses.
An equity investor exits through a public sale of stock or the sale of your entire company. Show you understand this process.
6. When will you pay us back? Use a cash flow projection to support the availability of future cash flow to repay the loans. Include principal and interest payments in the forecasts. Keep the terms within bank policy guidelines.
For equity investors, you must clearly describe hitting the targeted "exit window" within three to five years.
7. What happens if your plans don't work?
The lender counts on the personal guaranty of the owners plus business and personal collateral pledged to the loan. Use industry-specific information to prove the liquidation value of collateral.
Equity investors always have alternate plans ranging from changing your business technology to replacing you as the company leader. You should try to initiate the design of "plan B" to be in control of your company's destiny.
Investors will stay in contact by sitting on your board of directors. Lenders will monitor you through regular financial statements and occasional visits.
George M. Dawson is a small business finance consultant based in San Antonio, Texas. His advice has appeared in Inc., Entrepreneur, and Nation's Business as well as on CNBC-TV.
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