Ever since the Great Recession small business owners have been struggling to get loans from banks. On the macro level, we are seeing more and more encouraging signs that point to the increased availability of small business loans. Even with an improved overall lending climate, getting an actual loan is still a herculean task wrapped with a lot of red tape. However, I just want to focus on one aspect of the loan application process: your loan officer.
In my conversations with several loan officers that work for local banks that lend SBA backed Express Loans, I can tell you that these hard working people are simply overwhelmed with the case load.
A loan officer reads about 10 small business loan applications per day!
Think about this for a minute and put yourself in their shoes for the moment. If you skip your lunch break and work overtime, you could spend an hour, at the best, evaluating a loan application. Can you really understand the intricacies of the business model at hand for the company that operates in the industry you don’t have any experience with? No. You cannot. Neither can your loan officer.
Knowing that you only have an hour or less to impress your loan officer, you need to write a succinct explanation of your business model and revenue generation. Brevity is the key; hence one or two pages long executive summary is the most important piece of writing you will do. In your executive summary, you need to explain at the high level how does your business make money. Who is your target customer (be very specific), what is your addressable market size, how do you acquire your customers, what’s your product or service competitive advantage, how are you better than competition, how will you spend loan money and what will be ROI.
In addition to executive summary, make sure that you have a comprehensive business plan that supports your high level description in detail:
- Educate the loan officer about industry you operate in, because you have to assume that he or she is completely unfamiliar with it. Benchmark yourself against competitors (this is commonly overlooked); explain to the loan officer the industry average parameters for the market you are in.
- Who is your target customer and what does your product or a service offer to them that is better than industry average solution?
- Explain your “Go to market strategy” and client acquisition process
- Describe your internal operations, team and hiring strategy.
- Finance – this is the section that is well understood by all loan officers and most likely the only section they will read when tired by the end of their work day, so you have to make this shine. Cash flow is the key performance metric loan officers hone onto. Strong and steady cash flow is certainly a desirable positive attribute. For businesses that have been around few years and have some understandable fluctuations in their cash flow, owners’ personal credit score comes into a play. Needless to stay, the credit history has to be spotless and FICO score very high, ideally in 800 points range. Regardless, I would strongly suggesting hiring a CPA to do your pro forma statements in a format that is customarily used by finance professionals because looking at a document that has familiar formatting speeds up the decision making process.
- Finally, explain why do you need the money, how will you spend it and how will this loan increase ROI and grow your business.
Personally, I read numerous business plans as part of my job of a business consultant and as judge at several startup accelerator programs. It takes me less than few minutes to mentally categorize a business plan into “thumbs up/down” piles:
- This is document has been written by hobbyists who don’t understand their industry. Reading such document makes me feel frustrated and empty because the writer just wasted my time.
- This is document has been written by people who know how to write a good business plan with all appropriate elements. I look forward reading about their business model and learning more about their industry. A good business plan usually teaches me few things I haven’t known before.
Spending time to write succinct and effective executive summery, along with a business plan will ensure you get the loan you are seeking. If you help your loan officer with well-prepared documents, you double your probability of getting that loan. Take advantage of the fact that only 40% of new businesses actually spend time writing a formal business plan document.
Dragana Mendel, a management consultant for startups, small and medium size businesses develops and executes growth strategies for her clients.