Securing A Loan From The Bank

Securing A Loan From The Bank
Salon Owners Must Arm Themselves With Answers

by Jeff Grissler

Proper preparation and knowing the correct answers to the most common banking questions often determine whether a bank will grant a loan. The best way to prepare is to be ready to answer all objections. This article will cover five of the most common reasons that a bank rejects a loan, followed by some suggestions on how a salon owner may turn a denial into an approval.

Preparing A Business Plan

There are a couple of key steps a prospective salon owner can take to ensure that a loan officer is properly informed. First and foremost, prepare a business plan. The plan may only be a few pages; however, the key is that it's well thought out. Having a business plan available shows a loan officer that you have credibility as an owner and also that you put time and effort into the project, and you're not just rushing into a business you are unaware of.

Additionally, be prepared to supply business credit references and a personal credit history. An applicant must have a proven track record in repaying distributors and suppliers. The most important factor is that all personal obligations including mortgages, car loans, student loans and credit cards are made in a timely manner. If an applicant has a history of slow payment, an exceptional explanation, in writing, will be required or the loan request will be immediately denied. Good personal and business credit policies are the key to success.

Finally, a brief description of the indoor tanning industry also might be helpful. Remember, most bankers are not aware of how successful the indoor tanning industry actually is. The description should include how the industry has grown into a multibillion-dollar profession. A bank has to feel confident that the industry is professional and has the potential for growth. In the past, the reputation of the indoor tanning industry has been tarnished by individuals who have not run their business on a professional level; however, the industry has come a long way over the past 10 years. Educating a bank shows that you have done your homework, which in turn may put a bank at ease. This alone could make a "no" decision a "yes."

Analyzing Your Needs

When a loan officer asks how much money you need to borrow, don't reply with an answer such as, "How much will you lend me?"

While preparing for a bank loan, perform an in-depth analysis of your borrowing needs, no matter if you're starting a new business or remodeling or expanding an existing one. The first step is to meet with a local equipment distributor to find out the cost of the equipment that you want to install in your salon. After this step is complete, a contractor should be able to offer an estimate as to how much renovations and construction will cost. In addition, by using a business plan, it should give you an idea of how much operating capital is needed to open and run the business throughout the first couple of months. All this information is needed when you apply for a loan.

Balancing Your Numbers

Even if a current business has been marginally profitable, or even losing money, there is still hope; however, it will not be easy. Banks are trained to make decisions primarily based on a company's ability to generate sufficient cash flow through consistent profitability. If a business has lost money, you need to know the reason for the loss. The losses may be caused by the economy, health, labor problems or even the weather (many business owners will not soon forget the winter of 1996). The bank will want to know what changes you will make in order to fix these problems.

The most important aspect to the bank is the income and profit a business reports on its tax returns. If business owners engineer their profits so they pay little taxes, it is hoped that they have saved this cash, because they will not get a bank loan without a sound profit and loss statement for their business. Remember, hiding income from the government when filing your taxes will only hurt you when applying for a business loan. In addition, keep in mind a loan officer never wants to hear, "My tax return doesn't reflect what I actually make. I make double that in cash." This certainly will not give the right impression and will guarantee a decline of the loan.

Collateral

Small-business owners often complain that lenders lack an adequate understanding of the market value of assets such as equipment and inventory. Many times this is true. Bankers are not experts on most of the collateral against which they lend. Don't expect the bank to lend dollar-for-dollar against the collateral given, no matter what is being pledged. Banks have certain guidelines they follow in setting loan-to-collateral value ratios and generally will lend no more than 70 percent to 80 percent of the value of real estate, equipment and accounts receivable, and 40 percent of inventory.

A salon owner may have personal assets such as debt-free automobiles, bank certificates, stocks or real estate that could be used to secure a loan. It is guaranteed the bank will ask to secure your entire business and usually will look for other avenues outside the business, as well as personal assets, for collateral. You must address these issues before applying for a loan because an unsecured loan almost is impossible to find in today's banking world.

Personal Guarantees

Most banks will not loan to any business without personal guarantees from the owner(s). The purpose of a guarantee is to provide a secondary repayment source for the loan in the event the small business is unable to pay. What this means is if a salon owner borrows $10,000 and defaults on the loan, the bank personally can go after said salon owner for the balance of the loan. If the salon owner doesn't have the money, the bank has the right to seize any personal assets that equate to the amount of the loan.

As a matter of policy, banks ask for the owner(s)' personal guarantees. This demonstrates a full commitment on their part that will enhance a salon owner's chances of getting a loan approval. If a salon owner shows any reluctance by asking the bank if a personal guarantee is necessary, it will throw up a red flag and show that the salon owner is unsure of his or her business plan and ability to repay the loan. Putting this thought in any banker's mind automatically will decline the loan.

Applying for a small-business loan is not an easy process. Banks are not in business to lose money: that is why procedures have become so arduous--they do not want any risky propositions. However, if you are prepared to answer these common objections, you will improve your chances of obtaining the financing you need. Good preparation and showing confidence in your ideas as an owner will help establish the credibility necessary to convince a bank that you have the business sense and what it takes to be a successful business owner.

Jeff Grissler is vice president of Neptune, N.J.-based Quest Resources, Inc., the tanning finance specialists, and has authored numerous trade articles. For more information call (800) 449-0777, ext. 13 or log on at www.questresourcesinc.com.