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Tuesday, Dec 5, 2023


A messenger service in the San Fernando Valley was having a hard time getting a $150,000 loan. The owner had been turned down by two banks and felt that neither had bothered to understand his business or read the expensive, bound loan package he paid a consultant to assemble. His business was making lots of money, and because there was no inventory and receivables were paid in 28 days, he had plenty of immediate cash at his disposal.

He felt collateral was the issue, even though he had pledged assets worth two-and-a-half-times the loan amount.

After talking with him for 15 minutes and reviewing the package, I realized that he had never told either bank why he needed more money. The package just said “working capital,” but the real story was that he had an opportunity to grab the exclusive ground freight forwarding business of five international airline companies at Los Angeles International Airport.

These big airline companies paid their vendors in 40 to 50 days and the messenger company owner knew he’d sell himself into a bankruptcy if he didn’t have enough cash to support the new business. But he had neglected to tell the lenders the real reason for his loan request.

Once the use of funds was identified, projections were prepared that showed the impact of the proposed new sales. A good case was made showing how enough profits could be generated over three years to retire the debt.

The loan was approved 10 days later without a government guarantee or even a pledge of real estate.

Banks are anxious to make loans in this low-interest environment, but you have to give them the right reasons to do so. Common mistakes and oversights that I frequently see include the following:

– Failing to Pass the ‘So What’ Test: If all a loan will do is keep a company in perpetual motion, then a fresh injection of equity, and not debt, is usually what’s required. The issue is how new money will increase profits enough so that it can be paid back. You have to clearly state what you plan to do with loan funds that will galvanize the firm (new product, new market, new machine, new personnel) and lead to increased sales and profits.

– Not Knowing the Loan Amount: Even when a borrower knows why he wants money, he needs to do the homework necessary to be sure he’s borrowing the right amount. If it’s to purchase a machine, price it out before making the request. If it’s a new product, price out the costs of marketing, manufacturing and distribution before that application hits the bank. The worst answer any lender can hear when he asks for a loan amount is “How much can I borrow?” That’s an automatic decline letter.

– Wild Projections: I once had a machine shop owner show me on a fancy computer-prepared spreadsheet how sales would double in one year if he could just buy this new drill press. The joke was that he could afford the machine from last year’s profits if he didn’t increase sales by a nickel, but he thought he needed to wow me if he wanted a loan. Not true. I would have done the loan a lot faster if he just demonstrated an ability to repay me, pay himself and have a 20 percent margin for error. His projections showed me how little he really understood the capabilities of his business.

– Throwing Money at a Problem: Often a business owner doesn’t take the time to access his real problems but blames lack of working capital for all his woes. There is no substitute for clear thinking. A software developer wanted to buy more nationwide advertising despite the fact that 75 percent of his market had always been in Southern California, and he had barely begun to saturate that market. It turns out his sales manager had developed an “alcohol problem” and was not at work enough to be effective. Borrowing money would have only crippled the young firm with debt if it couldn’t afford to repay.

– Trusting Consultants and Packagers: You, the owner, know a lot more about your company than anyone else. You built it and it represents your investment of time, money and ego. The right consultant can help you cut through lending jargon to get to your company’s real story and tell it effectively, but at that interview with the bank, you have to be ready to tell your own story.

A business owner should know where the cash goes in the company, where sales in the future are coming from, what trends help or hurt the company and why a bank should consider his company a good risk.

Banks don’t invest. They lend with the full expectation of repayment from the cash resources of the company (not collateral, outside guarantees or liquidation). Be ready to demonstrate why you need money and how you plan to repay it when you meet with a lender and you’ll at least get a fair hearing and probably the money you need to move forward.

Bruce Dobb is the chief credit officer for the Valley Economic Development Center’s Revolving Loan Fund and a regular contributor to the San Fernando Valley Business Journal.

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