Knowing how and when to seek out a bank loan is very important in running your business. By Gary Shotton #000061
By Gary Shotton
I’m going to talk about getting a bank loan. Now, if you have listened to some of these you’re going to hear me say don’t get a loan, don’t borrow money. I’m an advocate of gaining some experience before you get a loan. You don’t want a bank loan to start with. You want to gain some experience first. The thrill of getting a loan and some cash flow for your business is soon tempered by the realization that you are going to have to pay that loan back.
Let’s say you go to get a loan from a bank,let’s talk about what a bank wants. First of all they’re going to want you to have some business experience. They will want your last three year financial statements. That’s income statement, balance sheet, tax returns, and those better match theirs. You know you have to show a profit on your financial statements, and then report to the IRS when you lose money. There’s ways that they can compare those and make sure everything’s on the up-and-up. So, that’s a given.
They’re going to want a business plan. It’s going to have to be brief . They’re not going to be interested in loaning you money just because you came in, just because you told them about what you’re doing. You’re going to have to have a business plan that’s readable and compelling. When you’re borrowing money, you should just borrow for critical things. Don’t borrow money for unnecessary things. I mean that makes sense, but some people do it. So, I suggest you only borrow money for fixed assets, you should refrain from borrowing money for operating expenses and only for fixed assets. Those things that are going to make you money, or be at least sellable if you don’t make your loan payment. The bank looks at that.
I’m here at a machine shop. I have about 35, 40 machines, most of them CNC. Most of them cost in between 250,000 and 400,000, and I have some loans on them.Those are generally on a five year pay out. When I pay them off at the end of that five years, I own them. I have a plan to buy new equipment every year. Another way to look at it is don’t ever borrow money for something that goes down in value. Something that depreciates year to year, unless it’s something that’s generating you revenue far above what your note payment is going to be.
Now, just because you don’t get a loan, don’t quit. I happen to get a loan for this when I started because I had experience in business.It wasn’t my first business, and I applied at four different banks. I did everything that I could to introduce myself…and guess what? Three out of the four said no. Well, the one that said yes, they knew me. They had some experience with me, and they knew who I was. They knew my abilities.
Do Your Research.
Don’t walk into the bank cold. Don’t just walk in without knowing who you’re talking to, without knowing a little bit about them. Look ahead of time and get with them , and let them know who you are. Don’t drive through the drive-thru window every time. Go in, wave at the loan officer, go up and talk to them. Just tell them something like “Hey, I might need a loan in the future. I’m just kind of getting to know you a little bit.” You don’t have to tell them a lot. Just let them know you, who you are, let them come in and see who you are. Don’t overdress, don’t under dress.. They only want to know whether you can pay the loan back. They’re not interested that you come in a three-piece suit. Just be natural, and if the bank says no, please don’t go borrow money from your family.At some point you’re going to have thanksgiving, and that food is not going to be very good when you owe the cooks husband $300,000. You’re probably not going to show up. So my suggestion is to separate your personal affairs from your business affairs on the loan. When you get a checking account, don’t mix your checks together. Don’t take money out of your company without it being a legitimate expense. Pay yourself a legitimate salary for what you’re doing, and then live on your household budget just like everybody else.
Your Banker is Your Friend
Last but not least, make sure you understand that your banker is your friend. He’s not your enemy. I’ve heard people almost cuss or cuss at their banker behind their face, because they wouldn’t give them a loan. Well guess what? They are probably saving your tail. They probably knew that this was an over extension of your ability to pay back. My banker, several times in my early days said, “You know, I can’t loan it. You’re just going to have to figure out how to tighten your belt.” Well, I did, and I made it.
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