LOAN STRATEGIES FOR ENTREPRENEURS.

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Author: O'Brien, Lisa1

Most small businesses turn to banks for their financing needs, typically relying on lines of credit for working capital, and term loans for asset financing or long-term expansion. Bank lenders must carefully evaluate the financial state of the small business before approving a loan, and generally will focus their financial analysis on three areas: performance over the last three to five years (if history is available); future performance based on projected changes in a business' financial condition and the business' strength based on their balance sheet.

This financial analysis often is challenging, both for the small business owner and the lender. For example, small business owners may look for ways to reduce profits in order to be taxed at lower rates. This tactic can create a false perception of the company's performance.

Some tasks that the lender may undertake to ascertain the strength of: the entrepreneurial business include checking trade references and supply sources to confirm that the business can be assured of an adequate supply of goods to continue its operation. The lender also may review industry competition and trends. Are competitors outperforming the company? Is the industry as a whole growing or shrinking?

Comparison of a company's financial results with industry averages is another excellent way to determine a company's strength. Finally, the lender may visit the business premises for a physical inspection. In this way, the lender can learn valuable information about how the business is organized and managed.

1. Take the advice of outside counselors, such as attorneys, accountants or lenders. Entrepreneurs often leave prior jobs, after having "made it" in a highly competitive market, to open their own concerns. While they may need to take on substantial debt to open their business, they may feel they can get by without input from outside advisors, based on past successes. Yet, ignoring such advice can leave holes in a business financial plan that can send up a "red flag" to a lender. Entrepreneurs need the support of their team, their attorney, accountant, and banker for financial success.
2. Do not feel obligated to have everyone in the company report directly to you A business structure in which everyone reports to the top has no chain of command, and the owner makes all of the decisions Being "in charge" is what makes business people entrepreneurs, yet they still must provide for back-up decision makers to serve in their absence. Certain unplanned for financial situations can come up at any time, requiring a quick decision to satisfy a lender. A good contingency plan provides these safeguards.
3. Be a teacher, not just a do-er. The founder of a small business may be reluctant to relinquish control and train a successor. The non existence of a management succession plan impedes the loan process, as lenders must ensure that the business can survive the death or disability of the owner.
4. Set up an estate plan, life insurance or a will. The business may have to be divided or sold to pay estate taxes and bank loans when the entrepreneur dies Bankers need assurances that the business can continue after the death of the owner, or can be sold or liquidated quickly enough to cover all the costs,
5. Don't operate without a working business plan, A business with no specific plan for growth cannot clearly articulate its borrowing needs to sustain that growth.

Bottom line - you want your lender to show a high level of interest in your company because it will be a sign of the kind of service you will receive in the relationship. Furthermore, you will want to demonstrate that you have made a commitment to ensure your business is successful. In the end, a solid, long-term relationship between the bank and entrepreneur will pay dividends for the small business owner both in terms of start up and future expansion borrowing needs.

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By Lisa O'Brien

Lisa O'Brien, senior vice president of US. Bank Small Business Strategy and Support, has been in the banking industry for 18 years. She has specialized in small business banking for eight years, more than five of which have been with U.S. Bank. She is based in Cincinnati U.S. Bank is a subsidiary of U.S. Bancorp.