I was recently mentoring a late-stage technology start-up who was projecting additional working capital needs. While the owners of the company felt at some point they would need additional working capital, they did not want to dilute the ownership of the company. I suggested we get a bank loan, even though we did not need the money at the time. Why?
Fact: The best time to secure a loan is when you do not need the money.
Step 1: Create a Financial Package
We put together a financial package with projections for the banks. This gave them a full picture of the health of the business and our future needs.
Step 2: Identify the Banks You Want to Pitch
There were 13 banks in the Providence, Rhode Island area. Appointments were made with each of the banks. When the banks came to visit our office and data center, we gave them a tour and reviewed the financials and projections with them. We told them we were looking for $500,000 for working capital to expand the business.
Step 3: Be Prepared to Answer Questions (A LOT OF THEM!)
After we went through our presentation with the first 12 banks, they each asked the same question: What is your collateral for the loan? We showed them our client contract lists that were all A+ credit clients with readily known names.
Step 4: Expect Rejection
We got turned down by each of the first 12 banks because we did not have any hard assets and their bank policy was only to lend money on hard assets. We did not have any hard assets because all of our equipment was leased.
Step 5: Don’t Give Up!
We had just one more bank to approach. We set up a meeting and went through the same tour and reviewed financials and projections as before. The banker then asked us the same question: What is your collateral for the loan? We sat down once more and reviewed our contract list with the banker. This time we got completely different reaction. The banker was impressed by the list and said he would review with the lending committee our request. He explained to us that the bank had lost its manufacturing client base and now had service companies like ours as its clients.
The banker called me back after the committee gave him the initial go-ahead to proceed with negotiation of the bank loan. He asked me how much we wanted to borrow and I asked him what was his personal lending limit. He said $250,000 and I said that would be fine to start with the first year and the goal was to raise it to $500,000 the next year. The loan was approved and the next year the loan limit was raised to $500,000 as agreed.
Tip: Seek Mentor Who’s Dealt With Securing Working Capital
My bank board knowledge and working capital experience, coupled with the enthusiasm and business knowledge of the technology company founders, enabled us to find and secure funding. If you own a business that needs working capital – don’t go it alone! Seek a business mentor who can help you follow the steps above until you get what you need.
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