The Art of Small Business Borrowing

The ability to access reliable sources of capital is fundamental to the continued development and success of any small business. Yet finding a reliable source of debt capital may be one of the biggest challenges management faces.

Do you want your suppliers and vendors to provide you with their products and services on the best terms available? Do you want your bank to provide you with needed credit facilities (loans) to maximize your company’s growth and profitability? If you answered yes to these questions, then you must present your company in a professional financial manner.

If you have not spent the time and effort necessary to develop a business plan/loan package, you may not be ready to negotiate any type of credit for your company. Many business loan requests are declined, not because they are bad loans but because they are poorly presented.

Before contacting your banker for a loan, do some advanced planning and identify your specific business credit needs and company strengths.

How? Put it in writing! Use graphs, pictures, charts, color—anything that will help tell your story. This project does not have to be a novel, but rather 10-15 pages, including your financial information, which can adequately convey a convincing and well thought-out plan. A big part of successful negations is based on the quality of the presentation.

Banks will have their own standardized method of evaluating the acceptability of a potential borrower’s loan request. But virtually all lenders will agree that the most important aspect of a good loan can be categorized into three fundamental components:

Management: This factor is the most abstract and difficult for a bank to evaluate and measure precisely. The concept of “management” consists of many factors, including commitment, experience, flexibility, interpersonal skills, leadership and technical competence, to name just a few. Simply put, it is the ability to amass needed resources, while systematically employing these assets in a manner that will generate sufficient gross revenue to meet all operating costs, including the timely payment of interest and principle to the bank, with a reasonable profit remaining for the owner/manager.

Cash flow: Cash flow is the in-flow (receipt of cash from sales, collection of account receivables or the sale of assets) of revenue and the outflow (payment of operating expenses) of cash resulting from the normal course of transacting business. In other words, it’s the conversion of assets to cash in the normal business cycle. From the banker’s perspective, cash flow is the primary source of making future loan payments. The two most common methods of demonstrating the borrower’s cash flow capacity is through a review of historical financial performance and a Proforma Income Statement based on realistic assumptions.

Collateral: This is the asset(s) (accounts receivables, equipment, furniture and fixtures, real estate, etc.) offered to the lender to ensure loan repayment in case of default. The most difficult part of this process is to find agreement between the banker and borrower as to the liquidity and realistic property value. Most business-type assets have several different values. The lender is primarily concerned with the dollar amount the property will bring from a quick sale. Unfortunately, this usually translates to a sum that is less than the owner’s perceived value.

If the borrower can demonstrate his or her management skills, provide financial data indicating adequate cash flow and offer reasonable collateral to secure the transaction, chances of receiving the loan will be greatly improved.


As with all business activities, protocol is important in establishing and maintaining a successful banking relationship. If you adhere to the following list of dos and don’ts, you can be assured of developing and maintaining a strong relationship with your banker.


  • Make an appointment and be on time.
  • Support your request with a neatly prepared business plan and financing package. Provide all facts in writing.
  • Ask questions about the bank’s policies and expectations.
  • Sell yourself. Dress and act professionally.
  • Be flexible in your request—consider other alternatives.
  • Advise of progress and problems associated with the company, products or management.
  • Require involvement from your banker.


  • Be impatient. Allow the bank sufficient time to respond.
  • Telephone for interest rates. Interest rates are based on perceived risk, preparation and maintenance cost.
  • Ask how much you can borrow. There is no way to answer this question until the lender has reviewed the necessary financial package.
  • Change banks solely for the interest rate.
  • Surprise your bank. Always keep your banker informed of situations that may affect your ability to meet your financial obligation.
  • Make promises you cannot keep. If in doubt, re-examine your situation.
  • Make false statements about other banking alternatives. Never bluff.
  • Be overly optimistic about future sales/profits.

BarnesGarry Barnes is a director of PW Partners Consultancy, former bank president/CEO and a board member for Holladay Bank & Trust. Barnes served on the SBA National Advisory Council and was a consultant to the Central Bank of Russia (in-country).

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