Recently, I was asked by Jordan of Pennsylvania: I am preparing to pitch for a bank loan for my business. What sorts of materials and documentation should I prepare before I meet with the loan officer? What questions should I be prepared to answer? Below are answers from some members the Young Entrepreneur Council, an nonprofit led by many of the world's most successful young entrepreneurs, sharing their experience and insights.
1. Leverage your assets.
You should be able to show that you have assets to back your loan, and that you have a career that can support payment of the loan. Basically, you should be able to show that you are a safe bet for the bank.
2. Summarize your business plan.
The bank cares about one thing—getting their money back. You should prepare an "Information Memorandum"—a summary of a business plan that outlines the investment highlights for the bank. The things they will look at, in order of importance: Management team (experience), market opportunity, core business, growth strategy, exit strategy. They will also want to see that you are invested.
3. Know how and when you'll repay.
Be prepared to provide a repayment timeframe with your cashflow projections. Present your business plan stating your ability of long term profitability where you will repay the loan. Be up front and honest because most can see through a weak business plan too.
4. Put your personal finances in order first.
Before you meet with a loan officer, you'll need to prepare a case for your loan request. It's also very important that you put your personal finances in order. Be prepared to let the bank know what kind of collateral you can offer and to decide whether you are willing to sign a personal guaranty. (If applicable, also discuss this with your significant other!)
5. Have the right paperwork.
Although there's some red tape, the process is pretty standard. Banks will want to see your previous 2 years financials with profits in both year. Even if you show a loss, you still might be OK because bankers can add owner salaries and bonuses as profits which could help bring you into the black. You might also be required to have a good credit score and show personal financials.
6. Bring your contracts with you.
Have all of your projected financials in clear and usually accepted forms. Also, bring any revenue generating contracts you may have. Anything and everything that shows your company has a future (and some history) will be extremely helpful.
7. Spend the time preparing.
Make sure you have a resume, a business plan, legal documents, bank statements, and good credit since this will be more based on you then your business. Why are you applying for a loan? Who will be managing the business? What will you use the funds for? What credentials do you and your team possess? SCORE can help you and it's free.
8. Have a business plan.
Everybody knows that 40-page business plans are largely useless, especially for nimble, lean startups. But there's still one type of investor out there that wants, or even requires, to see them: banks.
9. Be prepared for hoops.
My first question would be—can you find creative ways to avoid a bank loan? The banking environment is particularly rigid these days and can be a major source of frustration for entrepreneurs. If there are no other options, be ready to show solid financial data. If possible, secure financing before you need it, because it is likely to be difficult to obtain when you really need it.
10. Work on your pitch and demonstration.
Keep your pitch between 1-2 min and make sure you speak out your idea clearly through 3-4 steps: What the product/service is? What problem it solves? Who would buy and why? To support your pitch, be prepared to present a demonstration or a prototype of your product/service. Keep it simple and get them excited. For last, give them a printed out version of your pitch & the main details.
11. Reveal Your Customer
Many business loan pitches are bogged down with numbers, projections, and lofty ideals. The bottom line of any business is the customers who buy the products and services. Know your customer inside and out. Build a case for why your customers will buy from you and how you'll build a lasting relationship with them.