SCORE WESTCHESTER

How To Approach A Bank

When you approach a bank for a loan, it helps to understand where the bank is coming from, its needs to know how your request fits in.

Remember banks are in the business of "renting" money. They charge the borrower rent (interest) and expect return of their property (money) when the lease (loan) expires.

Banks are eager to lend money to those whom they see as reliable customers. After all, lending money is their business. So, how does one convince the loan officer that he/she is a reliable customer?

First, describe your background (e.i. education and experience) and relate how this background prepares you for the task you are undertaking. Convince the bank officer that you are knowledgeable about this project. Stick to the facts. Do not tell him anything but the truth. That's part of developing the bank's confidence in your integrity and ability.

Tell them just how much money you will require. Never ask, "How much can I get?" or "Something between X and Y." You must convey the impression that you know what you are talking about in order to generate that confidence.

Then, outline what you plan to do with the money: buy equipment or inventory or advertise or a combination. Show (with numbers) that as a result of this investment you will be able to do a certain amount of additional business which will generate a certain profit from which you will be able to repay the loan (plus interest) over a given time period. Make sure the time period is realistic and not too short a time.

Banks know that it usually takes some time before a profit is created from an investment so it is often possible to negotiate a moratorium of principal payments for a number of months or until the investment starts to pay for itself by increased profit. Interest payments during this interim will normally be required. The bank will want you to be involved and expect you to provide 25%-30% of the project amount required and will normally require you to provide some form of security (stocks, bonds, home, etc.) for their share.

It is often wiser to arrange for a "line of credit" rather than a loan. If you do not need the entire amount of the borrowing at one time, it is more economic to draw only the amounts as needed (up to an agreed upon maximum) and therefore pay interest only on those dollars rather than on the gross loan. You and your banker can make that judgment.