If You Need a Loan, 
Give Good Answers 
to These 4 Questions 

Copyright © 2004
by Alex Goumakos, CPA

Too many small business owners waste their time and effort filling out loan applications, submitting proposals and reaching out to numerous potential lenders and investors when in reality, they're not in a position yet to get what they're asking for.

*For example, last month four small business owners I know (none of them clients) asked me to either invest money in their company or to introduce them to a few bankers and investors I know. 

I try to help as many people as I can. But after asking four simple questions, I had to respectfully say "no" to three of them. 

Here are the questions I asked:

Incidentally, two of the four small business owners who  asked me to help them had in fact new businesses, no major  assets and less-than-perfect personal credit. Surprisingly, two of the small business owners who asked for my help couldn't give me a valid and explicit purpose as to why they needed the money. 

QUESTION #2 - What do you need the money for?

In today's lending environment, "to pay the bills" is not 
a good enough reason. 

When applying for a loan, be prepared to provide exact 
and explicit details as to why you need the money. If you 
can't provide an adequate reason, or if your request is 
vague or speculative in any way, you won't stand a chance
- even with good credit. 

Quantify the reasons why you need a loan. Instead of saying, 
"I need the money for working capital or to pay bills" 
say, "I need $25,000 to renovate our showroom so that we can 
accommodate additional customers and increase our sales by 
$125,000 per year. Here's how the loan will help me achieve 
this goal..." 

And whatever you do, don't say that you need the money 
because of mistakes caused by partners, employees, vendors 
or anybody else. Nothing will turn off a lender or investor 
quicker than if you start bitching about a partner or employee 
who took too much money or who didn't pay the bills he or she 
was supposed to. 

Lenders and investors like stability. Besides, if you start 
blaming others for your company's predicament, you are in 
effect, undermining your own managerial ability. If lenders 
sense you're a poor manager, your loan request will be 
disqualified. 

QUESTION #3 - Do you have a business plan?

When I asked this question, three of the four small business 
owners said no. One owner even boldly told me he doesn't 
have the time to put one together.

The fact is, many small business owners (even some highly 
successful ones) don't have business plans. 

However, if you're seriously looking for money, a business
plan is a requirement, not an option. 

Whatever you do -- don't go overboard on your business plan 
because not everybody will take the time to read all of it. 
Instead, focus on the executive summary and your financial 
data. 

QUESTION #4 - 
Do you have any problems paying the bills?

Lenders and investors don't like to hear that a company 
can't pay its bills (especially if taxes and trade accounts 
are involved). 

Of all the criteria used to determine a company's 
eligibility for a loan - LIQUIDITY - a company's ability to 
pay its bills when they become due - is one of the most 
important. 

Here are some other highly important financial criteria that 
lenders and investors will be taking a close look at: 

* CONSISTENT PROFITABILITY - One of the first things a 
lender will do is determine if your company can pay back the 
loan. If your company can't support repayment of the loan, 
you won't get it, period. 

* FINANCIAL HEALTH - The principle method used to measure 
financial health is the debt-to-equity ratio (total debt 
divided by total equity). The traditional standard limit is 
2 to 1. A lower limit indicates a greater level of overall 
health, while a higher ratio will easily disqualify you from 
a loan 

* COMPARATIVE INDUSTRY DATA - Your company's financial 
information will be compared to others just like it in the 
same industry. If there are major differences between your 
financial data and the data of other comparable companies, be 
prepared to explain the reasons why.

When I probed the small business owners about whether they 
had any trouble paying their bills, only one said no 
emphatically. The others gave me the distinct feeling that 
their money woes were signs of deeper rooted issues. 

If there are severe and chronic cash shortages in your 
company, you need to find the underlying reasons why. 

Don't wait for a lender or investor to find out for you. 

While nobody likes to admit defeat, 
throwing money at a recurring problem is like committing 
business suicide. In other words, you should know when it's 
time to cut your losses. 

Keep in mind that no amount of money will solve the following problems: 

* a bad business concept 
* an incorrect price 
* poor customer service 
* mismanagement 
* a bad location 
* lack of a strong competitive advantage
* an owner who doesn't have his or her personal finances 
under control 

If you need money, it's important that you make a good 
impression by putting your company in the best possible 
financial light. To do this, you need to make sure you: 

1. Have good personal credit 
or you can get a co-signor who does. 

2. Can explain in exact details how you intend on 
using the money. 

3. Have a business plan with all required 
financial information 

4. Can show you have a profitable 
company that can pay its bills when they're due 

the end

Alex Goumakos, CPA has over 20 years of experience helping 
hundreds of small business owners to start, manage and grow 
their business. If you're ready to attract more customers, 
generate higher profits and pay less tax, sign up for his 
FREE ezine at http://www.goldminetactics.com/subscribe.htm . 
Or, visit his website at http://www.goldminetactics.com .

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