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Loan Seekers Must Be Prepared to Reveal All

Be ready to explain what you do and how you’ll repaySpotlight – Small Business

James Kocsi was wondering why a New Jersey busineswoman couldn’t get a $75,000 bank loan. Her financial records seemed to be in order, but six different banks had turned her down, says Kocsi, the Newark-based district director for the federal Small Business Administration (SBA).

Then he got a call from one of the bankers, saying the owner had run into his office screaming she was desperate for funds.

“Banks won’t give you a loan just because you need the money,” says Kocsi. “You’ve got to give them a sound presentation, backed by facts. Some small-business owners just don’t seem to get this point.”

It’s a good idea to start with the basics.

“When a business owner goes in to see a loan officer, he or she should have a current set of financial statements, one or two years worth of tax returns, a description of the business, and an outline of what the loan will be used for and how it will be repaid,” Kocsi says. “They should also check [their] personal credit report and clear up any inaccuracies, and bring along a set of personal financial statements, since most banks will require an owner’s personal guarantee for a small-business loan.”

For small business, 2005 was a banner year for loans. Nationally, for the fiscal year ended Sept. 30, 2005, the SBA guaranteed 88,912 loans of loans, up 23% from fiscal 2004. On a statewide basis, the SBA handled 3,687 loans, up 29% from the year-ago volume.

Even so, a significant number of first-time entrepreneurs and established business owners are missing out on loans that could be used to expand operations or refinance expensive debt, says Marc Blumenthal, a principal with Sax Macy Fromm in Clifton.

“A lot of them think they can give a minimal amount of information to banks and still get a loan, but it doesn’t work that way,” he says.

Even on a relatively small, straightforward loan, a bank needs some basic financial statements and credit information for the business and its owner. When it’s not straightforward, banks will dig deeper.

“When a company’s looking for a highly leveraged loan [where there is a disproportionate level of debt to assets or debt to equity], or for working capital, the process becomes more challenging and the bank wants more information,” Blumenthal says.

That can mean turning in business projections and cash-flow schedules that let financial institutions know just how a business plans to repay its loans.

Some business owners, like Ray Torella, seek help preparing the materials. When Torella, a real estate developer who also owns Tore Electric in Belleville, sought a $10.5 million financing package to build a 54-unit residential development in Sparta, his first stop wasn’t his bank; instead, he met with Stuart Berger, a Sax Macy principal who chairs the firm’s real estate industry service group.

“I don’t do anything without their input,” says Torella, referring to the CPAs at Sax Macy. “They know the big picture.”

Berger notes that banks don’t want vague assumptions about future revenue streams that’ll be used to pay down debt. They want hard numbers based on actual trends, signed contracts and other tangible evidence of solvency.

“Before you apply for a loan, consider what you’ve got for collateral,” he says. “Meet with your accountant and run the numbers, too. See how your sales, accounts receivable and inventory relate to your projections. Many business owners are reluctant to commit this information to paper, but your banker has to answer to a loan committee that’s asking some hard questions.”

Record keeping is another sore spot that can trip up an otherwise qualified loan applicant.

“We see a fair number of small and medium-size enterprises that make innocent errors when they record their business activity,” says Robert Brown, a manager in WithumSmith

Brown’s Red Bank office.

Most of them, he says, aren’t out to commit Enron-style fraud; they simply don’t have the expertise or resources to track their activities accurately. This can lead to misclassifying assets such as machinery and equipment and potentially misstating the collateral that’s available to the bank in case of default.

Either overstating or understating revenue and expenses can jeopardize a loan by making a business seem weaker than it really is, or by making it appear to be too profitable: A company that operates too far beyond industry norms sets off warning bells in a loan officer’s mind.

“A good banker is, by nature, conservative,” says Brown. “He’ll be very familiar with an industry and have a good idea of what to expect from a business.”

Adds the SBA’s Kocsi, “Right now there’s a lot of capital out there chasing after deals. But you’ve got to be able prove that you can repay a loan.”

Successful Borrowers Are Ready for a Grilling

Experts say it’s a good time to look for a loan: Interest rates are relatively low and there’s a lot of capital looking to be put to work. But to qualify, a would-be borrower must convince a banker that he or she will be able to make all the payments. Here are some tips to help get through the process:

– Be prepared to explain what your business does and how the loan will be used. If a banker understands the enterprise, he or she is in a better position to judge just its viability.

– Bring along financial statements, tax returns and other necessary documents. The idea is to give the lender an understanding of the business’ financial health.

– Conduct yourself like a professional. Remember the old saying: “Lenders only make loans to people who don’t need the money.” Bankers get scared if a loan prospect comes across as desperate. Stay cool, even if you’re facing a financial deadline.

E-mail to mdaks@njbiz.com

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