“I win. You owe me a hundred bucks – and a meal” I said as we stepped out of the bank into the 105 degree heat of the Texas summer sun. Grinning, I walked over to my friend’s pickup and stuck out my hand.
“Nope. Not yet. I want to know how you did it. I’ve been trying to get a loan from that bank for three years. So, if I've lost our bet and I have to buy you lunch and hand over a hundred bucks – I want my money’s worth.”
“Let’s do it”, I said. And I climbed into his truck and off we went.
Banks have been all over the news lately. Big bank bailouts, small bank failures, Wall Street bankers and their outrageous bonuses. But none of that seems to matter when you’re sitting in the lobby waiting on a loan officer to give a thumbs up or down on your future. What’s any of that got to to do with getting the money you need to grow your business anyway?
Of course, the real answer is “it depends”. If your credit needs are minimal (house, car, credit cards) and you are using a credit union or small community bank, the impact of all that credit tightening you hear the talking heads on TV chattering about may not be clear to you. On the other hand, if you are a small fish in a big pond, say,… at Bank of America, Wells Fargo, Citibank, or Chase, you may have already experienced some or all of the following:
1. Your long-standing credit line was called unexpectedly;
2. Previous loan commitments were postponed, canceled, or worse, you were asked to re-submit the whole thing again;
3. Loans, though not in default and sometimes in place for years, were called with little or no explanation (other than they could); and
4. Obtaining new credit anywhere appears to be impossible.
Sorry to say that none of this is new. You may be outraged to find that nobody cares about your small or mid-sized business, but the fact is they don’t.
If your revenue exceeds the 10 million dollar mark, you may be able to get – and keep – the attention of some "wannabe acheiver" among the lower ranks of banking executives at one of the big multinationals. And I’d argue that even then, you may not be well served at that institution. At the same time, if you are successful and don’t have 10 mil or more to throw around what do you do?
To put it simply: find another bank. For those closer to the magic number of 10 mil, a Regional bank will probably fit the bill, but the vast majority of folks out there who need a mere million or so to fund their next acquisition, expand their distribution line, or buy industrial equipment still need to look elsewhere. Think Main Street instead of Wall Street.
How do you find a bank that will listen?
The simple answer is to choose your bank well, deliver a pitch perfect presentation (loan request), and most importantly, speak using language they understand. How to go about selecting the correct bank and what language you should use are topics for another time. Addressing the loan proposal is what we’ll cover today. But first, let’s talk a minute or two about what we don’t want to do.
In short, we -
- do not want to be sitting in the bank’s lobby on Monday morning desperately trying to get a loan to cover the checks we wrote the previous Friday afternoon.
- do not want to deal with people we don’t know and who don’t know us – if we can help it.
- do not want to work with anyone “experiencing” his or her first day (or year?) as a loan officer.
- do not want to appear disorganized in front of the banker
- do not want to be the least bit unclear as to our needs.
This is the time to step up and become part of the 1 percent and not the other 99 percent who do all of the above. In other words, we’d like to stick out – in a good way. But there is a bit of homework to do first.
Before I even think about submitting a loan proposal, I like to get to know my loan officers (and the bank execs); and you should too. What I mean is that you should know a little about their hobbies, where they went to school, their children’s names, what their interest are, etc.
I also make an appointment to see the loan officer/exec at a time when it’s convenient for both of us. If this is someone new to me, I’ll drop by with a business card inside an envelope explaining who I am, my business, and my interest in seeing him/her. I find that the card inside the envelope usually sticks around where a business card alone often gets tossed into the nearest trash can as soon as you leave.
By the way, this is a great time to put a reference letter or two inside that envelope. Letters from (bank) board members work well, but letters from other banks in other cities work best of all. You did know they were going to check you out, right?
Hey, if you haven’t any references – it’s no big deal. But you should make getting a few good references part of your long term strategy. Trust me, it will be worth the trouble.
One more thing – you may want to think of submitting a loan proposal as a “sales call” and treat it as one. If your prospect, the loan officer, seems busy or distracted then set another time to come back when you can have their full attention. And remember, sending your proposal by email or by phone may be convenient for you, but unless you own the bank – you’re not likely to have a successful outcome.
On that first appointment, I’m careful to ask about the bank, the loan officer’s experience, and often, the contents of their latest call report which is kind of a "snapshot" that summarizes of the bank's financial situation (Click here for a more complete definition of a call report).
What I’m doing is making sure I have the correct “fit” with the bank. The selection process I mentioned earlier should have already narrowed the field considerably, but nothing takes the place of actually checking the place and the people out for yourself. And nothing ever will.
Remember: this is not the time to ask for a loan. This is the time to bring up what you do – real estate, beauty salons, kiddy balloons, whatever. You can also talk a little, and I mean very little, about your plans for the bank. Again, make like a great salesperson and listen: L-I-S-T-E-N.
Back to your introduction speech - You only want to introduce the loan officer to your expertise, not your project. Something along these lines may work for you:
“Currently, I’m working with a group of investors to acquire some multi-family housing projects in your city (area, county, etc.) and I would like to explore the possibility of working with your bank on some of those acquisitions. (Pause) If I drop a loan proposal by your office, is there any reason you wouldn’t take a look?” (Wait for an answer. Say nothing until you get one.)
Hint: You should already have determined that this bank does indeed like to loan on multi-family real estate or whatever your project is about. If you’ve done your homework and get anything other than “sure”, you need to head for the door and look for another bank.
At your next appointment, you should have your complete loan proposal in hand with extra copies for your loan officer, his compliance department, and a couple for the loan committee. Personally, I use a spiral bound presentation format, with a cover, and tabbed sections for each logical part of the project. Don’t worry, if you don’t have time to make extra copies, concentrate on making the one you give your loan officer the very best you can.
In short, the bank will want to know the answer to five questions:
1. How much money do you need?
2. When do you need it?
3. What are you going to use it for?
4. How will you repay the loan?
5. If all else fails, how will the bank protect itself, its capital, and its profit? (You may know this as Plan B, but to the bank it's called a Secondary Source of Repayment).
Write your answers down in complete sentences on no more than a page or two and package your backup materials in as well. Just as in grade school, neatness counts. Again, make separate sections describing as much of the proposal as possible – surveys, improvements needed, zoning change requirements, etc.
Important: The very first section should be an informal letter from you to your banker outlining the answers to those five questions listed above. It needs to be concise and to the point. This one piece of information will be your loan officer’s “cheat sheet”. When answering questions about your proposal, this letter will be their main reference. Everything else is there to support this document. Don’t make him/her search for relevant details about your proposal. And do not make him/her look foolish in front of their peers and superiors. Remember, you won't be there to answer questions so your documents have to make your case for you and be easy for others to find the answers they need. Consider this: Could your wife take these documents to the bank and answer their questions? Could a friend? That's what I mean by clear, straightforward documents.
The last point, number 5, is probably the most over-looked item and is almost as important as the initial letter. Yet, almost every "green" customer ignores it. I guarantee you that your banker won't. This is where you make it very clear to the bank that you take their position seriously. You expect them to make the loan which will be repaid – out of your alternate resources, if necessary. Remember that secondary source of repayment?
Doing your homework and preparing your documents will give you a newfound sense of confidence. Being sure of your project’s numbers and your presentation will go a long way in making the bank sure of your project, your performance, and you.
While some of you may feel this is taking it a bit too far, I don’t. The point of this exercise is to move you and your project to the head of the line and past all those people sitting nervously outside the banker’s office. Remember, they need to cover those checks! It’s not necessary to be the perfect loan candidate, but it is easy to stand head and shoulders above everyone else. And that’s the point.
In reading over this, Ray Alcorn pointed out that most banks are NOT looking for new customers right now. Instead, they are increasingly choosing to work their own "A" lists in an effort to bolster their loan revenues and put things on the books they feel can stand up to scrutiny. That means they want to deal with folks that have both a track record and who have capital in reserve. That's just the way it is. You can whine and complain about it or you can decide to become one of them (the A-lister's).
It won't be easy, but then again nothing worth while ever is. If you really want to play in this league, make plans to follow along in the next few weeks as we discuss this further.
Most of us have heard the old joke about two attorney’s hiking in the woods. Spotting an angry bear heading in their direction, one begins to wail and moan about their impending doom while the other begins to take off his hiking boots and put on his running shoes.
“You can’t outrun a bear, you fool” shouts the first attorney.
“Don’t have to outrun the bear” said the other.
“Just have to outrun you.”
Point taken. By now you should be able to draw the connection between the punch-line of this joke and making a successful loan proposal.
Back at the ranch, it’s late in the day. My friend and I are seated outside on a shade-covered patio watching fish swim lazily by in the clear water below.
“Is that all there is to it?”
“Not at all. But that will get you started and it will get you a lot farther down the road than most people ever get.”
“What about the rest?”
“Well, there’s learning to choose your bank properly. And how to use language so the banker can understand you better – I call it “Banker Speak”. In addition, you need to know about developing the relationship, how to maintain that relationship, and even how to work a backup plan. You know, everybody needs a Plan B sooner or later.”
“How do I find out more?”
“We’ll talk more soon. But I have to warn you, it’s going to cost you more than just a lunch.”