by Bridget Lair
In the excitement of starting a new business, entrepreneurs often fail to recognize the need to learn more about finances. Most rely on their own savings and on investments from family and friends, but unless they're especially flush, sooner or later they'll need outside financing, most likely from a bank.
"I've had bankers say to me, 'If they can't handle their own money, they can't handle ours,'" says Devron Veasley, director of the Bessemer Business Incubation System and acting executive director of the Bessemer Industrial Development Board in Bessemer, Ala.
"Many people have never even looked at their credit report, and when they do, they don't understand what they are looking at," Veasley says. "One of the most important things an incubator manager can do is help with projected financial statements. To approach a lending institution, an entrepreneur's financial status must be in order, including three years of tax returns, profit and loss statements, and cash flow projections."
A summary document that demonstrates trends in business growth will "paint the picture" for lenders and help them see the story behind a company's numbers, says Larry Maschhoff, retired banker and current manager of the Center for Emerging Entrepreneurs at Illinois State University in Normal, Ill. "Show that the percentages are getting better – even if there is not a long track record."
If the business has had financial issues in the past, Maschhoff says, "Be up front and clearly describe what the problem was and how it is now corrected. Banks are looking for an excuse not to lend. If there is a mistake or inconsistency, they will see it right away."
In fact, entrepreneurs shouldn't hold any information back. "If clients are filing a tax extension or if they owe back taxes and are working with the IRS, they should get a letter from the IRS or their accountant explaining the situation. The banker will want to see it," says Tiffany McVeety, director of the Girandola Center in Seattle.
Nor should entrepreneurs expect more from banks than they expect from themselves. "They [potential borrowers] come in looking for a loan when they have no equity in the project at all," says Donna Russell, manager of member business services at the Ohio University Credit Union in Athens, Ohio. "They want the bank to take all the risk. A lot of entrepreneurs may be a great manufacturer of a widget, but they have no bookkeeping, no vender source, they don't have key people in place. They tend to forget there is a lot more to running a business than building a widget. Lenders want to know, 'How are they going to manage all those other pieces?'"
Most incubator managers agree that helping clients organize their personal and business finances is the first step toward securing outside funding of any type, but teaching entrepreneurs how to approach a lender is equally important.
Through coaching, incubator managers can help entrepreneurs be better prepared when they make presentations to lenders. "There is a lot of fear on the part of clients; they are nervous and don't know what to expect. We coach them through the process – help them understand what questions they will be asked and how to answer them truthfully and effectively," Veasley says.
The Louisiana Business Technology Center in Baton Rouge, La. holds several "dry runs" or pitches to help clients prepare before they meet with a lender. "We help [clients] prepare documents and pull together packages with tax returns, a business plan and other required documentation, but the most important thing we do is coach them on how to make loan requests and how to act in front of the banker," says Charlie D'Agostino, executive director of the LBTC.
"This is especially important for our technology/scientist-type clients, who want to explain how they split the atom and not how they will make money to pay off the loan," he says.
Banks may prefer a specific type of business over another, or they may or may not be in the market for a particular loan or particular business at that specific time, based on their portfolios. LBTC coaching stresses that just because one bank says no, it doesn't mean all banks will. "We try to make the client aware of this and to be resilient and persistent," D'Agostino says.
Some incubator managers make presentations to lenders with clients, while others prefer to let their clients chart their own paths. Incubator managers report success using both methods.
In Louisiana, LBTC makes introductions and then lets clients speak directly with lenders. "We try to get out of the way when they are talking details and negotiating the agreements," D'Agostino says. "We have strong relationships with our local banks and generally know or have discussed the potential for success prior to setting up the meeting."
In contrast, Maschhoff asks lenders to come to his office to meet clients, and he helps present the client's case. "I call banks and explain the situation. I paint a picture before they even see the financials," he says. "I include five years of income and expenses on the balance sheet, so people can clearly see the trends without digging through a mile-high stack of paper."
Whether the incubator staff help make the presentations or not, they need to know what bankers are looking for to help clients prepare. Fred Green, director of the Red River Region Business Incubator in Paris, Texas, invites loan officers to give presentations and discuss how they make loan decisions. This knowledge helps incubator staff and the on-site Small Business Development Center counselor teach applicants how to write a business plan and cash flow projections that meet banks' criteria.
You would not advise a client to source materials from only one supplier, so why should finance – a fundamental need for a small business – be any different?
Many incubators encourage clients to establish relationships with multiple banks before they need funding by opening checking accounts, saving accounts, credit cards, etc. That way, entrepreneurs have already developed relationships with lending institutions before they approach them for loans.
Alternative lenders, such as U.S. Treasury Community Development Financial Institutions or other revolving loan funds, specifically target higher-risk enterprises, but entrepreneurs are not eligible for alternative funds if they can receive money from a commercial bank. McVeety recommends teaching clients how to efficiently get a no from the bank to help them move on to alternative lenders more quickly.
Regardless of which lending institution clients intend to approach, LBTC prescreens loan applications. "The better we prepare the client, the better chance there is for the bank to successfully fund the company and to keep our strong reputation in the community," D'Agostino says. "We must make sure we do our analysis of the client and not refer any clients to our banks who are not prepared, not legitimate and not capable of being successful."
The contributing incubator managers also offer this advice:
Charlie D'Agostino, executive director, Louisiana Business & Technology Center, Baton Rouge, La.
Fred Green, director, Red River Region Business Incubator, Paris, Texas
Larry Maschhoff, manager, Center for Emerging Entrepreneurs, Illinois State University, Normal, Ill.
Tiffany McVeety, director, Girandola Center, Seattle
Donna Russell, manager of member business services, Ohio University Credit Union, Athens, Ohio
Keywords: Funding sources/Fundraising – client, capital access, microenterprise
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