This article is second in a series from Ron Sturgeon’s newest book, Getting To Yes With Your Banker. The book includes 93 secrets you likely didn’t know about dealing with your banker from an entrepreneur and a lender’s perspective. Co-authored by Ron Sturgeon, a serial entrepreneur, and Greg Morse, Founder and President of Worthington National Bank in Tarrant County, Texas, it is packed with tips and advice on how to choose a banker and develop a fruitful relationship with them.
So, I guess we can overstate the obvious and say the first thing bankers don’t want to see is a business plan written in pencil on a big yellow pad, says Ron.
Greg: True, but at the same time I want to know that the person whom I’m dealing with wrote the plan and understands it. When someone brings me a business plan in a fancy folder, the first thing I’m going to do is throw the fancy folder away. If I kept them all, I’d have a stack of plastic folders as high as a skyscraper. Try using a manila folder; they’re practical and inexpensive.
Ron: So as a banker, what are you looking for in the business plan?
Greg: The first thing I want to know is what you do and how you do it better than other people.
Ron: I call that a Unique Selling Proposition (USP). When someone tells me they have an idea for a business, one of the first things I ask is, “What’s your USP?” They’ll tell me about how their service is going to be better or they’ll have a stronger commitment to quality. What they don’t understand – and what I always tell them – is that those are features, not benefits, and they are not unique!
It’s hard to define a USP. And by the way, I’m not saying that having the best service is a bad USP, but I want them to tell me what makes their service better. What are they willing to do to make their service different from everybody else’s? I want to understand that. Good examples of USPs might include:
• Our machine does something the competing machine doesn’t do (that’s the feature), and that translates into a third less operating expense (that’s the benefit).
• We are going to offer better customer service (a feature). We will accomplish that by making sure that the widgets the client requests will actually fill his need (a benefit); our competitors just sell the client what he asks for with no questions asked.
• Our delivery is faster and more accurate (a feature). We accomplish that by using RFID tags attached to the merchandise throughout the distribution process (notice that we discuss exactly how we will accomplish a goal). They will know at every point where the item is, so we and they can identify a problem earlier in the fulfillment process and eliminate disappointment (a benefit). RFID is radio frequency identification technology; an RFID tag attached to an item reports where the item is for inventory and logistics purposes.
Greg: A lot of times, people think being the lowest-cost provider is their benefit. But when they say that, it’s almost always automatic that I’m not making that loan.
Ron: You almost never want to be the low-cost provider.
Greg: No, you don’t! People don’t realize that if they under-price their competitors, they’re the ones who are going to go away, not their competition. No one wins in a price war. No one! You have to have some kind of benefit that customers are willing to pay a little bit more for. And I’m not talking about having a building with a pretty lobby. You have to have that USP.
Ron: So from a banker’s standpoint, what else do you want to see? You’re expecting the business plan to include what they do, a little bit about their background and their successes – but not too much. They need to make it very succinct. Would you say that’s correct?
Greg: Yeah, and I want to know that they have experience doing what they want to do. If they don’t, they need to have a partner who does. The business plan they give me should basically be their loan write-up. It should give the banker enough information to go in front of the loan committee and say, here’s why they need the money. More importantly, here’s how they’re going to pay it back. I need to know about your background, I need to know good things about you, and I need to know if I’m going to read something bad about you in the paper tomorrow morning.
Ron: Yes, the days of lending on “ideas” are over. Experience and a track record of success are imperative. About the business plan, on the other hand, you don’t want too much information. With most business plans that people give me, they’re one of two things – and both are wrong. Either the plans are one or two pages or they’re 35 or 40 pages.
A business plan should be as succinct as possible, but it should also be as complete as possible. It should have the math – the pro forma math for at least three years and maybe as many as five. If this is an existing business and there’s a history, it should have some reporting from that. The banker wants to see how the cash flows, and it should include information about the people, their education, their experience, their product or service, and the company.
It needs to have an overview of what they’re planning to do and how they’re going to use the money. To address your point, Greg, it should have the primary, secondary, and last (gasp, this is a curse word to a banker) source of repayment. The value of the collateral is seen as the weakest source of repayment because it’s almost always impaired at the time of repossession or foreclosure, so make sure there are other sources of repayment rooted in cash. All of that should run between eight and 20 pages.
Many times customers think that they should get a loan because their collateral is good, but that would be asset-based lending. Bankers want the collateral to be the last source of repayment, so if you don’t project cash flow, they don’t want your loan.
I think you always need to include an executive summary that isn’t any longer than four pages and has some excerpts from the math, like charts with the top line and bottom line – a condensed version of the full-blown business plan. That would be my idea of what a banker wants to see.
Greg: That’s all good. We also want to see an outline that has the business description, the name of the business, location, a description of products or services, and management expertise. Then it should go into their personal business history. How long have they been in business? What does the ownership look like, and what makes them qualified to run this business? Finally, you need to define your business goals and give a financial summary.
If you can put all that together, you are off to a good start.
Ron Sturgeon, founder of Mr. Mission Possible small business consulting, combines over 35 years of entrepreneurship with an extensive resume in consulting, speaking, and business writing. Contact Ron at (817) 834-3625 or e-mail rons@MrMissionPossible.com
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