How to Get a Loan

IMGCAP(1)]Nancy Exten did two incredible things recently.

She sat through an entire episode of Two and a Half Men. And she secured a $2 million working capital loan for her business.

Pretty incredible, isn’t it? Having that kind of discipline and focus is what sets Nancy apart from other penny pinchers. She really knows how to overcome any obstacle and accomplish even the most difficult of challenges. Spend 22 minutes watching Charlie Sheen and you’ll know exactly what I mean.

As for the loan, I’m exaggerating. Sure, Nancy got it. But it wasn’t that incredible. And yes, I know about all the big news. How there’s been a credit crisis. How banks aren’t loaning money to small businesses. How the federal government had to inject funds in the banking system just to get money out to businesses. How Charlie Sheen and Denise Richards have reconciled. How the Small Business Administration has started new programs to help small businesses get financing.

Nancy found that the credit environment today isn’t as good as it was a couple of years ago. But then again, wasn’t that the reason why the economy went into this recession in the first place?

Two and a Half Men became popular the old-fashioned way: Its star, Charlie Sheen, got a lot of media by going through a very public divorce, rehab and engaging in sexual escapades. And Nancy got her loan the old-fashioned way too. She got it because she didn’t need it. What better reason is there?

Nancy Exten had collateral to put up. She signed away the assets of her company. She mortgaged her personal residence. She gave personal guarantees.

Basically she stepped up and said to the bank, “I’d like you to loan me money and I understand that you’d like to see my commitment too.” Despite what we read, banks aren’t all that bad. In fact, most of them are surviving the recession just fine. These banks don’t want to just hide their money away. That’s what the government’s for. Banks are businesses too. And they want to minimize their risk. They’d like to know that the people they’re giving money to also have some skin in the game too.

Nancy’s other incredible accomplishment? A business plan. A what? Oh yes, we remember those. A business plan is prepared when applying for a loan. It’s usually requested by those horrible bankers who have the audacity to ask an applicant how one planned on spending the money they were asked to lend him or her.

Nancy put together a detailed document. In it she described her company’s history. She gave biographies of herself and her management team. She wrote about the potential risk factors involved. She laid out exactly what she needed the money for (equipment and inventory purchases) and how she intended to draw down the loan. She included historical financial statement, certified by her outside accountant. She completed a detailed cash flow analysis showing how the loan would be paid back over the next five years.

A business plan? How quaint and old-fashioned. Well, not anymore. A few years ago bankers seemed to request business plans if only just to tick away a requirement on the due diligence checklist. Now they’re requesting business plans and…actually reading them. GASP! And, hold on, Nancy even received feedback on her plan. Advice for her business. Insights that she found helpful. Now that is incredible.

About a month after Nancy’s loan was approved, another incredible thing happened. Two and a Half Men was renewed for another season. And something else: Nancy’s banker called her and asked her to stop by and visit. Why? “To check on my investment,” he said to her. Actually, he wasn’t kidding.

Since getting her working capital loan, Nancy found herself with a new partner: her bank. In this new world, banks are no longer just doling out money and forgetting about their customers. They’re keeping a much closer eye on them. They want their customers to succeed. They want them to pay back their loans. That way they earn their interest and have the opportunity to make more loans.

Think watching an episode of Two and a Half Men is hard? Try complying with some of the financial covenants the bankers asked of Nancy. She had to maintain ratios of working capital and debt to equity. She needed to make sure her receivables and cash were more than a few times accounts payable. She needed to meet certain return on equity and return on assets commitments.

Her banker kept checking these covenants with her. You’d think she’d mind. But being a good penny pincher, she saw the benefit. She liked the advice and the insight he brought to her business. She appreciated his MBA background and the resources of the bank that he brought to her business. He advised her on how to do things better and improve her results. Not a bad partner to have.

Sure, Nancy had to open up her books. That’s what partners have to do. Bankers want to see all the financial information they can so they can do their best to not only protect their own investment, but ensure that their customers do well.

Nancy got her loan. It wasn’t easy. And it was probably a lot harder than if she applied for it a few years ago. But should it be that easy? Shouldn’t banks ask tough questions? Shouldn’t they be doing the proper research? Shouldn’t they demanding collateral and the ability to pay their loan back, with interest, and on time? And shouldn’t we, as penny pinchers, welcome their help?

Gene Marks, CPA, is the owner of the Marks Group, which sells customer relationship, service, and financial management tools to small and midsized businesses.