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Bankers Don’t Bite

I’m convinced that most small-business owners are scared to death of bankers. They view loan officers as stiff-lipped stuffed-shirts who exist only for the pleasure of foreclosing on little old ladies on Christmas Eve.

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Banks are often accused of loaning money only to those who don’t
really need it, and even then only if cash or blue chip stocks
are put up as collateral.

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But banks don’t make money unless they make loans. And because
more than 80 percent of businesses in America are considered "small"
businesses, banks are very active in financing small-business
ventures.

Here’s a riddle for you: What do you call a loan officer who’s
so conservative that he never makes any loans?

Unemployed.

So, now that we’ve established that banks really do make loans
to companies other than those named General Motors, we must address
the next question: How can you, the body shop owner, tap into
banking resources to help you expand your business?

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What follows are 10 helpful hints that should provide a valuable
guide to those of you seeking help from a local bank.

The Business Plan

Just as this should be the first step for any entrepreneur looking
to start a new venture, preparation of a business plan is vital
for a body shop proprietor looking to expand a business. A good
business plan should include a narrative section – information
on the history of the business, an industry analysis, the background
of management and plans for the future – and a numbers section.

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It’s not as bad as it sounds. First of all, the narrative section
doesn’t have to be a novel. Most bankers appreciate conciseness,
so try to limit the narrative component of the plan to three or
four pages.

"Our bank is big on bullets of information," says Bill
Holt, Durham City Executive of Wachovia Bank of North Carolina,
one of the leading small-business lenders in the Southeast. "We’re
looking for a good concise summary, not a thesis. In fact, we
prefer to see the facts presented one by one rather than in paragraph
format. We’re making a factual decision, so we want facts, not
fluff."

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As for the numbers part of the plan, you’ll want to include historical
financial information (at least three years back if your business
has been around for awhile), as well as projections for the future.
The banker will need to know that you’ve thought about the shop’s
potential upcoming growth and its impact on the bottom line.

The projections can be kept simple but must be based on reasonable
assumptions. For instance, if you’ve grown 25 percent each of
the last two years, it’s probably unrealistic to project a 100
percent sales increase for the upcoming year.

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"When the projections are too high, I lose confidence in
the owner," says Brent Priddy, a business services officer
with BB&T, a bank headquartered in Winston-Salem, N.C. "Unrealistic
projections lead me to wonder if the borrower is still trying
to convince himself about the viability of the business."

Most importantly, the projections should demonstrate that your
business will operate profitably in the future.

The business plan is often the most intimidating step in seeking
bank financing. If you’re unsure exactly where to start with your
business plan, check your local library or bookstore for books
and other reference materials that will help you organize your
plan.

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Community Contacts

Once you’ve decided to seek bank financing, it’s a good idea to
tap into your contact base. For instance, your bookkeeper or accountant
may be very helpful in the preparation of your business plan,
particularly the numbers section.

"If we know someone mutual or someone has called ahead in
preparation, it can save time," says Glenda Frangenberg,
a commercial loan officer with Citizens Bank of Jonesboro, Ark.
"If a prospective borrower is referred by someone I know
well, then I can be pretty confident they’re legitimate. It can
reduce the time spent on the verification phase."

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Many communities also offer free business counseling services
through organizations such as SCORE (Service Corps of Retired
Executives), Small Business Technology and Development Centers,
Small Business Administration counseling, small-business incubators,
and local universities and community colleges. I’ve seen many
small-business owners in a wide variety of industries receive
valuable free advice from organizations such as these, and I would
generally recommend them to any body shop owner undergoing significant
change of any kind.

Owner Credibility

Many shop owners are reluctant to toot their own horns, but this
is a necessary function for those seeking bank financing. While
this can certainly be overdone, it’s important for the shop owner
to establish his or her credibility by providing the banker with
management background. This can be communicated both within the
business plan and in one-on-one contact with the banker.

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Every loan officer knows that the strength of management – or
lack of – can make or break a business. For this reason, lenders
are interested in knowing why you’re qualified to run a body shop
and to manage other people, and if you understand the numbers,
among other things.

Don’t worry if you’re the only manager in your business. This
won’t necessarily count against you – many small businesses have
only one key executive. As long as you can prove to the banker
that you have the qualifications to run your shop profitably,
you shouldn’t have any problem establishing credibility.

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Equity Requirements

Bankers pay very close attention to the capital base of existing
businesses seeking financing. Why? Because if your company already
has a large relative amount of debt, the loan officer will be
reluctant to add to it.

For corporations, most banks measure capital strength by calculating
a debt/worth ratio. In layman’s terms, this is simply the amount
of total debt versus the amount of equity. The ratio can be computed
by dividing total liabilities by stockholder’s equity. If this
number is higher than about 3:1, a red flag usually goes up to
the loan officer to pay close attention to the leverage position.

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For proprietorships, equity is harder to measure because the business
and business owner are legally one entity. If your shop is organized
as a proprietorship, your personal financial statement will become
more important, since the banker will want to see that you’re
building personal equity through the profitability of the company.

In fact, most banks will require that you submit a personal financial
statement regardless of the type of legal entity under which you
operate your shop. "In addition to historical financial statements
on the company, we require a personal financial statement on the
owner," says Frangenberg. "If the owner is loaded to
the gills with personal debt, that’s a problem."

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Collateral Requirements

Any discussion about borrowing money will inevitably get around
to the question, "What do you have to offer for collateral?"
If you anticipate this question and are ready with an answer,
you’ll definitely be ahead of the game. Simply make a list of
everything you could offer for collateral with a description of
the asset and an estimate of its value.

If the loan will be used to purchase specific assets, be sure
to include these on the list. Bankers have a bad habit of expecting
the worst, and providing a good collateral list can improve the
loan officer’s comfort level as he or she considers your loan
request.

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"Collateral is a very important factor for all of our small-business
loans," says Scott Day, a vice president with First National
Bank of Michigan in Lansing. "The amount of emphasis we place
on the collateral depends on the whole package. In fact, it can
be the determining factor in certain situations."

Still, don’t expect the bank to lend dollar-for-dollar against
the collateral given, no matter what’s being pledged. Banks have
certain guidelines they follow in setting loan-to-collateral value
ratios. For example, banks generally lend no more than 80 to 90
percent of the value of an vehicle or real estate; 70 to 80 percent
of machinery, equipment and accounts receivable; and 40 to 60
percent of inventory.

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You may also have personal assets – debt-free autos, bank certificates
of deposit, stocks, real-estate equity – that could be used as
collateral to adequately secure the loan and convince the lender
to say yes.

Note: Most banks won’t lend to any incorporated small business
without personal guaranties from the owner(s). The purpose of
a guarantee is to provide a secondary repayment source for the
loan in case the body shop is unable to pay.

If your body shop is incorporated, go ahead and offer your
personal guarantee. The banker will almost always ask for it anyway,
and offering it up front demonstrates a full commitment to your
shop that will only enhance your chances for loan approval.

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Use of Borrowed Funds

It may seem obvious to explain to the banker the purpose for which
the money is intended, but I’m often amazed at business owners
who come to the bank for financing and really don’t know what
the borrowed funds will be used for.

Give careful thought to how much money you’ll need and the purpose
for which a loan is needed. Before you go to the bank, be prepared
to provide specific information on the loan purpose.

This process may also help you revise your loan request. Many
entrepreneurs find, as they sit down to analyze the particulars
of a loan request, they have over- or underestimated their borrowing
need in their initial analysis.

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Repaying the Loan

The first thing a banker learns is that the most important component
of any loan request is the repayment source. If the bank doesn’t
get repaid, it doesn’t make any money, so it’s understandable
why this is so critical to the loan officer.

Again, before you go to the bank, give some serious thought to
how you will repay the loan. If repayment is in doubt, maybe the
timing isn’t right to borrow the funds. If you’re confident in
your shop’s ability to generate sufficient cash flow to repay
the loan, then this will only demonstrate to the loan officer
that you understand what’s most important to him and the bank.

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Downside Risk

Every business decision has some downside risk, and it’s important
that you address the potential pitfalls in your loan request.
The trick is to cover the prospective drawbacks without sounding
too pessimistic. But a happy medium can be found.

The key is to show the banker that you’ve considered the what
ifs and that you have a Plan B if things don’t go as they should.
For instance, let’s say you’re seeking a loan for a new spraybooth
to cover an anticipated increase in paint jobs. If you’re unable
to generate sufficient business to cover the booth from off-the-street
traffic, your fallback position might be to seek more DRP business.
Letting the banker know this shows you’ve considered a contingency
plan that will still result in repaying the loan.

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"Not considering the potential problem areas in a loan request
tells me the prospective borrower really hasn’t thought through
his plans," says Priddy. "If he hasn’t been thorough
enough to address the pitfalls, then why should I take the chance
of making the loan?"

The Right Bank

Finding the bank that best fits your needs can often be the hardest
part in seeking a loan. Sometimes, it seems there are as many
different lending philosophies as there are banks, but there should
be one out there that’s right for you and your shop.

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You can prospect for the right bank several ways. First, if you
have a deposit account or any personal loans at a certain bank,
you’ve already established some rapport that can be used to obtain
a small-business loan.

Second, you may want to consider utilizing your contact base.
Your accountant or attorney probably knows a number of bankers
and can often steer you in the right direction by making an initial
contact on your behalf or by giving you a name to call.

Third, try asking your customers who they bank with. They’ll often
have long-standing relationships with certain bankers and may
be willing to help you get a foot in the door.

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Red Flags

The last helpful hint can often make the difference between a
yes and a no from the lender.

Lenders look for a number of red flags that are critical factors
in any loan request:

First, you must know how much you want to borrow. Responding to
the question, "How much do you need?" with "As
much as you’ll lend me," may sound like a safe answer, but
it demonstrates a lack of planning and will almost guarantee a
denial no matter how profitable the business.

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Second, be sure your loan-request package is well-organized and
neat. This may sound obvious, but you’d be surprised at how many
coffee-stained business plans, some even with pages missing, are
presented to bankers. If the banker perceives the shop owner doesn’t
care enough about his or her financing need to present it neatly
and completely, then why should the loan officer be expected to
show any enthusiasm for the request?

A final red flag that bankers often see is the business owner
who defers all the financial questions to his or her accountant.
Lenders cringe at the thought of a business owner who has not
taken the time to understand the financial side of the business.
And if the lender cringes, then the loan request will usually
crumble.

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Lend Me an Ear

Remembering these small-business loan hints should come in handy
the next time you’re seeking financial assistance to expand your
business.

By keeping everything simple and concise, you’ll be able to focus
on what’s really important – which should go a long way toward
convincing the lender that your request is worthy of a yes.

J. Tol Broome Jr. is a contributing editor to BodyShop Business.

Check it Out

Here are 10 helpful hints to remember when seeking financial help
from a local bank:

  • Prepare a business plan and include a narrative section –
    information on the history of the business, an industry analysis,
    the background of management and plans for the future – and a
    numbers section.
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  • Establish your credibility by providing the banker with your
    management background. This can be done within the business plan
    and in one-on-one contact.

  • Pay close attention to your capital base. If your shop already
    has a large relative amount of debt, the loan officer will be
    reluctant to add to it.

  • Make a list of everything you could offer for collateral with
    a description of the asset and an estimate of its value. If the
    loan will be used to purchase specific assets, be sure to include
    these on the list.
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  • Give careful thought to how much money you’ll need and its
    purpose.

  • Know how you’ll repay the loan. If repayment is in doubt,
    maybe the timing isn’t right to borrow the funds.

  • Address the potential pitfalls in your loan request. Show
    the banker that you’ve considered the what ifs and that you have
    a Plan B if things don’t go as they should.

  • Prospect for the right bank. Check banks you already have
    accounts or loans with, contact your accountant or attorney and
    ask your customers who they bank with.
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  • Avoid being red flagged. Lenders look for a number of red
    flags that are critical factors in any loan request, so know exactly
    how much you want to borrow, be sure your loan request package
    is well-organized and neat, and don’t defer all the financial
    questions to your accountant.

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