Going After a Loan : Taking financial statements, tax returns and products to the bank betters the chances that your request will be approved.

When small-business owners talk about their success, their tales rarely include happy stories about getting money from a bank. In fact, most owners are members of a dubious club: people who have been denied a bank loan.

Defensive bankers point out that banks have nothing against small-business owners. In fact, every year they lend millions of dollars to small and medium-sized companies.

But, small-business people frequently set themselves up for failure by going into a bank unprepared, desperate for funds or ill-informed about what a banker needs to make a loan. Or at least that is the view from several veteran bankers who agreed to share their tips for successful borrowing.

“A small-business person assumes a banker knows more about their business than they do, and that is not true,” said Dannie Hayes, a first vice president in Security Pacific Bank’s commercial lending division. “A small-business owner should take the time to explain their business to their banker.”

Hayes and other loan officers said small-business owners must realize that banks are conservative institutions that rarely take risks with depositors’ funds. That is why banks are not likely to provide risk capital or seed money for new businesses.

“Companies have to understand the difference between a venture capitalist and a bank,” said Tom Beeler, a vice president at Bank of America with 30 years of lending experience. “The bank makes money on the spread between the cost of funds and the interest charged on the loan. The banks don’t participate in the appreciated value of the business” the way venture capitalists do.

In addition, most banks require potential borrowers to provide three years of detailed financial statements, preferably prepared by an outside accountant. Banks also require three years of business and personal tax returns. And, they would like to have product brochures, actual products, resumes, reference lists of customers and suppliers--anything that helps the banker “build a file” on a company.

Presenting the material in a cleanly typed, clearly organized fashion is also important. One banker suggested asking your accountant to not only prepare the financial statements but review various financial issues so you can easily answer the banker’s questions.

All the bankers recommended establishing a strong relationship with a bank before you ask for money.

“No matter how you define it, you want to have an established relationship with a bank,” said John Engel, a vice president for Wells Fargo in San Jose. “It really may be a business we want to lend to, but we don’t have experience with the customer.”

Engel and others said if you have all your business and personal accounts at a bank and the manager knows you, you’ll have a better chance going there to borrow money.

“It also helps if you are referred to our bank by a large depositor,” said David E. Rubin, senior vice president and regional manager of American International Bank in Glendale.

Rubin suggests practicing your presentation and being comfortable with the financial information.

“A lot of times, the interview is what turns the loan officer on or off,” said Rubin. “When an applicant has his financial statements prepared, the person on the other side of the desk is going to be much more receptive.”

After compiling clear and accurate financial information, the bankers say to be specific about what you need the money for. Do you need funds to buy inventory for Christmas sales? Do you need money to buy new office equipment? Bankers like to know exactly how their money will be spent. They also want to know exactly how you plan to repay the loan.

“A loan needs a primary and a secondary source of repayment,” said B of A’s Beeler. He said company owners should be willing to offer various types of security including stocks, bonds, and certificates of deposit. “Accounts receivable are not considered security by a bank.”

Most small-business people also fail to realize that smaller loans can be more risky to a bank than larger loans. Why? Because a company borrowing $1 million is usually big and strong enough to pay it back. A company borrowing $25,000 to cover a shortfall of some sort may not be in business next month, they fear.

After you make sure the banker understands exactly what your business is about and why you want to borrow money, the banker still needs to read a detailed business plan.

“We like to see a paragraph or two on the history of the company, along with a short- and long-term business plan,” said Robert Klein, an assistant vice president at First Interstate Bank in Los Angeles.

Klein and other bankers also ask for personal financial information. For start-up companies, Klein said he often suggests the owner establish a personal line of credit to use for business purposes. And, he said, be honest with your banker and don’t try to cover up any past credit problems.

“The character of the borrower is of almost equal importance as their financial strength,” said Klein.

Before applying for a loan, the bankers suggest contacting TRW Inc. or another credit reporting service to purchase a copy of your credit history. If there are problems or mistakes, they can be cleared up before the bank orders the same report.

“Bankers don’t like surprises, because a surprise is usually a problem,” said Security Pacific’s Hayes.

Timing your loan application is also important. A desperate borrower is not a very attractive one, the bankers agree. You should leave time for the application to be processed and the documentation to be drawn up. All the bankers interviewed said they can usually give a yes or no answer within two days. If you are applying for an unsecured loan, it takes about a week for the papers to be completed and the check to be issued. Secured loans requiring property appraisals and or other evaluations can take three weeks to a month to process.

Leaping the Hurdles

Everyone makes mistakes. What is the worst mistake you have made in starting or operating your small business? And, how did you solve it? If you are willing to share your experience, please describe your mistake and solution in a letter of one page or less. Send it to: Jane Applegate, Small Business columnist, Los Angeles Times, Business Section, Third Floor Editorial, Times Mirror Square, Los Angeles, Calif. 90053.

Awards for Enterprise

Avon Products Inc. and the Small Business Administration are sponsoring the third annual “Women of Enterprise Awards” for women who have overcome a “significant personal or economic hardship to achieve success.” Candidates may be nominated by local and national women’s organizations or apply directly. To qualify, a woman must have been profitably self-employed for a minimum of five years.

For an application, send a self-addressed, business-size envelope with 88 cents postage to: Women of Enterprise Awards, Avon Products Inc., 9 West 57th St., New York, N.Y. 10019.

Completed applications must be received by Feb. 15. Five winners will be honored at a luncheon in New York City in June.

Franchises Showcased

The International Franchise Assn. is hosting its “World of Franchising Expo” at the Westin Bonaventure Hotel in downtown Los Angeles Saturday and Sunday. The show, featuring franchises from all over the country, is open from 12 p.m. to 6 p.m. Admission is $5.

TIPS ON GETTING A LOAN Establish a strong relationship with a bank before you ask for money. It helps to have all your business and personal accounts there. Present financial statements, tax returns, business plans and other material requested by the bank in a cleanly typed, clearly organized fashion. Practice your presentation before the interview at the bank. An ill-prepared applicant is apt to turn off a lender. Be honest about any previous credit difficulties. Get a copy of your TRW or other credit reports and clear up any problems before going to the bank. Allow yourself plenty of time for the loan to be processed. The worst time to apply for a loan is when you’re desperate.