Here is another chapter from the book: Business Back Belt
If you are writing your business plan with the intent (now or future) to apply for a bank loan, it’s a good time for you to read this…


If you’re looking for a loan or line of credit over $100,000 or SBA-backed financing, you’ll need a business plan. Bankers are almost the opposite of investors. They loan the money deposited from people who’ve been guaranteed to get it back with a little interest. The money was deposited with the idea that there’s little risk, so bankers won’t risk it. Bankers use the five Cs: Credit, Character, Cash-flow, Collateral and Capacity—when evaluating a loan. They also look at a company from a deliberately pessimistic point of view to minimize the risk, so you must have good answers to their questions to demonstrate that you understand the issues.

Zen and banking
The old saying is that bankers will give you the money when you don’t need it. This echoes the Zen philosophy: When you really want something, you don’t get it. (And you can’t not want something in order to get it either!) When you completely let go of something, it comes to you and you have it. When you don’t need money, bankers seem to want to give you money. That’s the way the world works. Nobody wants anyone who’s desperate. So, the more you try to get bankers to give you money, the more they don’t want to give it to you. (The more you throw yourself at investors, the more they turn away.) Let’s look behind the scenes.

The nature of the banking business
For example: You ask for a $100,000 loan. The way the banking system works is that they mark up the money they pay depositors by about 2% (the spread). In the backs of their minds, they’re looking at you and considering, “What if you can’t pay this $100,000 loan back?” Remember, in business you have to make up any losses from profits, not sales. So, how much profit is lost if they lose your loan? Two percent at $100,000 is all the profit from five million dollars worth of loans. So if your loan goes bad, that means they lose the equivalent of all the profit they would make on five million dollars worth of loans they’ve made elsewhere.

They need your first born
Now you can imagine why they scrutinize every loan. They look at how much business they would throw away if something went wrong with yours. That’s why they’re going to look at everything about you, including your character. Your credit history plays a big part here. They want to be sure you’re the kind of person who’s going to pay back the loan. They don’t want to get left holding the bag because they’ll lose all their profit. That makes it even more imperative that you know what you’re doing in your business. So what do you do? You’ve got to show them a track record. You need to prove that you can pay your loan back no matter what. That’s also why they want collateral-it’s insurance so they won’t have to take it out of their slim profit.

Prerequisites for a bank loan
A bank wants to see a track record of profit for the past three years which also means you have to have been in business for at least three years. Banks are looking to finance growth, not cover for inefficiencies. Show them how you’ll use the loan to improve efficiencies in your operation. For example, buying a printing press will save money over buying printing if you spend a fortune on printing. Then the loan would make sense. However, if cash is short because you’re slow to collect receivables, then the loan doesn’t make sense. If you could collect your receivables faster, you wouldn’t need the loan. They prefer a debt-to-equity ratio of less than 3 to 1. This is one of a banker’s measures of risk. Bankers hate risk! The debt-to-equity ratio compares the amount of what you owe to what you own. Banks expect that you will repay your loan out of cash flow-show that you’ll generate enough cash (not just profit on paper) to repay your loan. If you can show that the loan improves cash flow, so much the better.

Sandbag your projections by just enough to assure that you hit your numbers.
~ An anonymous banker

If you can hit your projections then apparently you understand your business and have it under control. You should have solid financials based upon conservative assumptions. Future projections should be conservative and show steady growth with profits over the next five years. Too much hype and too much projected growth equals too much risk.

Part of your financing package should always include a reasonable explanation of anything unusual in your credit report. I recommend including this explanation up front in your financing package because inevitably they will ask you about this unusual item on your credit report and you’ll have to address it. If you want to speed the process of your financing, have this answer prepared in advance and include it with your package. If nothing else, at least a half page explaining the situation. For example, right now my credit report has grown to about seven pages since I started my business. It got that way because bankers, investment firms, and finance firms have looked into my credit report over the years for credit cards, limit increases, leasing, equipment purchases, and a number of other things. Every one of those inquiries appears on my credit history.

Many years ago, I had a pager that I rented from Pacific Bell, and one month I missed a payment on that pager. I thought I turned it in and made my final payment, but because the phone number was wrong, they added to my credit a debt of $27 that they say went to collections. I stubbed my toe on the $27 in the process of buying my house. It came up when we got our credit line, it came up when we got our SBA loan, it reared its head again when we got our credit increase. Every single time, I needed to explain why this $27 in collections on a simple pager was on my credit report. The banks questioned nothing else. (Seven pages worth of credit and the only thing that really disturbs anybody is the fact that a $27 pager payment was on there for collections!) Obviously, when I first heard about this debt, I immediately sent $27 because that was infinitely cheaper and easier than trying to argue with the company. Nevertheless, for all future lenders, I prepared a half page explanation of why my $27 pager payment is on there.

Use your business plan as a brochure, a tool to coach the loan rep to sell your company internally. Believe it or not, bankers want to know about your market, so include a strong analysis of your market as well as a sensible marketing plan. Back up your sales projections by demonstrating the demand for your product or service and your ability to reach and sell to customers who will ultimately provide the cash to repay your loan.

When you talk to your banker, remember to remain calm and sane. Too much entrepreneurial enthusiasm frightens bankers. This is a matter-of-fact deal, business as usual.

I hope you found this bit of Business Black Belt wisdom useful!



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by David Yurth.

How did the leader of tiny North Vietnam get the mighty USA out of his country? Likewise, how does an underfunded innovator compete in an industry that makes more money treating the problem than it would by simply solving it? Cancer, pollution, garbage, water, food…

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Why Segment Your Market?

by Administrator 07.26.2012

In our last post, we talked about how to segment your market. Why will you want to do this, though? It is only human to ask the question- how will this benefit ME? To put it simply, knowing your market will allow you to determine your target customer. Target Customers Now that you’ve segmented the […]

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Segmenting Your Market

by Administrator 07.10.2012

In our last post, we talked about two important factors for your market analysis, the market size and the market conditions. Today we’re going to talk about demographics which will allow you to segment your market. After you segment your market, you will be better able to understand who your target customer will be and […]

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Creating a Winning Marketing Strategy

by Administrator 07.06.2012

I know, I know- everyone wants to read about the Executive Summary– but let’s show the marketing plan a little love… So you’ve started your plan and you’ve reached the marketing strategy. Of course, you’ve already read our previous post, Components of a Business Plan part 2, but you want something a little more in […]

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Components of a Business Plan (Part 3)

by Administrator 06.29.2012

Written by Burke Franklin, founder and CEO, JIAN This is part 3 of 3.  If you missed parts 1 and 2, pick your poison- Part 1, where we talked about the executive summary or Part 2, where we talked about the market analysis and strategy. Let’s drive this puppy home. 11. Management Team– What’s a […]

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Components of a Business Plan (Part 2)

by Administrator 06.26.2012

Written by Burke Franklin, Founder and CEO, JIAN We talked last week about the beginning sections of your business plan. If you haven’t read it yet, click here to play catch up. This is part 2 of 3, so make sure to check back with us soon. 7. Company Overview– Give readers the basic information […]

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Components of a Business Plan (Part 1)

by Administrator 06.21.2012

Written by Burke Franklin, CEO and founder, JIAN “The plan is nothing. The planning is everything.”      – Dwight D. Eisenhower There may have been a day when people read business plans cover to cover. Not anymore.  When they get close to giving you money, they might, but first you have to grab their interest and […]

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What Investors Want to Know… (Cont’d)

by Administrator 06.20.2012

When you’re writing your business plan, you want to make sure to highlight what sets you apart from other businesses.  A good way to do this was put forward by Scott Miller, co-founder of Core Strategy Group, small business coach for and co-author of the books ‘The Underdog Advantage’ and ‘Building Brandwidth.’  When writing […]

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What Investors Want to Know…

by Administrator 06.19.2012

Written by Burke Franklin, Founder and CEO, JIAN For a moment, put yourself in an investor’s position (actually, do this throughout the plan writing process). What would YOU want to know about a business before you invested in it? Think about investing money in a friend’s business to get the mental, physical, emotional and spiritual […]

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What is a Business Plan?

by Administrator 06.15.2012

Written by Burke Franklin, founder and CEO, JIAN A business plan is a written document used to describe your business.  The sections of a business plan are fairly standard, so you can find lots of help from those that have gone before you. Each section in a business plan has a specific purpose.  Certain sections […]

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