How to Get a Business Loan

Contents

Chapter 1: HOW TO WRITE A WINNING BUSINESS PLAN

Preparing Your Plan

Why You Need a Plan

Determine Your Reader

Strive for an Eleven

The Differences Between Business Plans for Bankers and for Venture Capitalists

The Greatest Business Plan Ever Written

The First Thing They Look At

Common Problems with Business Plans

Mini-Business Plans Won’t Do

Practice Your Answers

Your Best Connection Is Another Entrepreneur

Seek a No (A Short No Is Better than a Long No)

What to Do When a Venture Capitalist Turns You Down

Putting Together the Plan: Questions and Answers

Chapter 2: THE COMPONENTS OF A SUCCESSFUL BUSINESS PLAN

How to Price Your Deal

Preparing Your Financials

The Table of Contents

Answer the Negatives

The Answer Sheet

The Approach

Feel, Felt, Found

Gaining the Commitment

Chapter 3: BEFRIENDING YOUR BANKER

The First Step—Open Your Mind

The Jelly-Bean Principle

It Just Ain’t Fair

What You Should Know About Your Banker

Protection from Banking’s High Turnover

Bankers are People, Too

Mancuso’s Ten Rules for Banking

Chapter 4: INVESTIGATE YOUR BANK AND YOUR BANKER

How Strong Is Your Banker?

Check Your Own Credit

Evaluating Your Bank

Obtaining Inside Information

No Banker Is an Island

Chapter 5: DEALING WITH YOUR BANKER

Think Like a Banker

How to Answer Crucial Questions Your Banker Will Ask

What If He’s Just Plain Mean?

Ten Tips for Communicating Effectively with Banks

Chapter 6: HOW TO STAY OFF PERSONAL LOAN GUARANTEES AND GET OFF THEM IF YOU’RE ALREADY ON (DITTO FOR YOUR SPOUSE)

Is It Worth It to You?

Ask and Ye Shall Receive

Ask for the Future, Not for Now

Help Your Banker Be a Hero—Give Her a Good Story

Ask for Money When You Don’t Need It

If You Can’t Get Off It, Chip at It

Negotiating the Loan Agreement

How to Keep Off Personal Guarantees in the First Place

How to Keep Your Spouse Off the Guarantee

Build Your Case Piece by Piece

Homesteading

A Lawyer’s View

Chapter 7: SMALL BUSINESS ADMINISTRATION LOANS

Why You Should Know About the SBA

The SBA Personal Guarantee

How to Apply for an SBA Loan

Don’t Believe All Those Myths About SBA Loans

Avoid Little Things That Will Slow Down Your Loan

SBA Field Offices

Other Ways to Use the Small Business Administration

Chapter 8: THE ETHICS OF BANKING

Increasing Lender Liability

Protecting Assets and Avoiding Lawsuits

Heartbreak Hill

APPENDIX I Glossary

APPENDIX II The Entrepreneur’s Reference Library

APPENDIX III Sample Application for a Business Plan Loan

APPENDIX IV Sample Business Plan

APPENDIX V Ingredients of a Real Estate Loan Submission

INDEX

IT’S A BOY!

While I’m reluctant to report personal matters in this book, this bit of news is just too good to hold back. My wife, Karla, and I have been trying for five years to have children. The old-fashioned way didn’t work. Neither did in vitro fertilization (though the medical bills we incurred while trying were enough to make a dent in the national debt). And adoption agencies told us we were too old to adopt a child—we’re in our forties. I have three married daughters from a previous marriage.

We also looked into foreign adoptions, tried advertising in rural newspapers, telling friends, acquaintances—you name it, we tried it. Nothing seemed to work.

Then Karla, the real entrepreneur in the family, suggested we run a small ad in USA Today. I’d like to say that I responded by saying Good idea, but actually I discouraged it. As happens in most partnerships, she did it anyway. The ad read Loving couple seeking to adopt . . . and gave our phone number.

The one-inch classified ad, which ran for a week, drew three good leads. We visited all three and decided on a young woman in Texas who was seeking a home for her baby, which was due in early March. This was November.

On February 18, 1988, Max Karl Mancuso, six pounds, thirteen ounces, was born. On February 21, 1988, we legally adopted him. He is a gift from heaven.

Hallelujah!

1. How to Write a Winning Business Plan

PREPARING YOUR PLAN

A business plan is commonly thought of as a document written to raise money for a growing company. In actuality, a business plan is a road map that gives a business direction. An entrepreneur visits his banker, or a venture capitalist, with his business plan, not his hat, in hand to attempt to raise money for his business. Attempting to raise money without a written business plan is pure folly, for your would-be backer undoubtedly will say, Well, when your business plan is done . . . .

The ideal business plan should really sing, so that you don’t have to raise money as the plan will do it for you. The problem for most entrepreneurs, though, is we hate to write business plans. We think of them as a form of punishment or as some species of cod-liver oil—we know they are good for us, but they taste awful going down. So we write adequate business plans because we’re too busy doing the real work of running our businesses. That work is more fun.

When you take your adequate business plan to your loan officer, what do you end up doing? You sit across from him, lean forward, and start compensating for the shortcomings of your plan with your forceful, charismatic, and persuasive personality. It’s called selling.

Well, guess what? Your banker has seen this scenario a hundred times. You’ve acted just like everyone else he’s turned down for a small-business loan in the last ten years. Everybody walks into his banker’s office with an average, adequate business plan. You can easily distinguish yourself in your banker’s eyes by taking the time to write a great business plan.

I’m going to show you the components of the ideal business plan, and then present to you the greatest business plan I think I’ve ever seen. (I’ve seen quite a few; in fact, I have probably the largest archive of business plans in the world).

My theory is if I show you the ideal business plan, you’ll be able to compare it with your own and make some practical improvements in yours. You’ll be one important step closer to getting your loan. I want you to bear two important things in mind, though.

First, most bankers and financiers don’t have emotional attachments to specific kinds of businesses. They don’t care if they invest in restaurants or computers, haberdasheries or medical devices. They have an emotional attachment to making money, and bankers are neurotic about the word risk.

Second, you cannot copy someone else’s business plan, you can only learn from it. If someone tries to tell you they have a computer program that writes a perfect business plan, don’t buy it! Each business plan is unique, like a work of art. In fact, it is a work of art in its own right. It expresses and personifies your company. You can no more write a business plan by following a format than you can paint the Mona Lisa using a paint-by-numbers kit.

WHY YOU NEED A PLAN

The need for a business plan is usually inversely proportional to the desire to write one. If you find you want to skip this chapter because you don’t think you need to write or improve your plan, you probably need to read this chapter more carefully than any other.

Let me ask you this: Have you ever been in a situation where you’re driving an automobile, but you don’t know the destination and your passenger is directing you? Doesn’t it make you crazy when your passenger gives you only short-term directions like Turn left here or Take a right here. How many short-term directions can a human being take without knowing where he’s going . . . before he blows up?

My limit is three; then I turn around and say, Just tell me where the hell we’re going and I’ll get us there. I’m not stupid! Give me more than one direction at a time!

Well, a business plan gives you your destination, and that’s tremendously important, not so much for you but for everyone involved in your business—your employees and investors, your customers, and your suppliers. They don’t want to just blindly follow your short-term directions, they want to know where the company is headed.

People have a great need for knowledge; in fact, many people are willing to take large risks for small amounts of information. I realized this while observing people waiting for a train at a New York City subway station. Now, I’m not a native New Yorker, so I tend to hug the wall while I wait for a train, for fear that some nut is going to shove me onto the third rail. But many people walk right up to the yellow line at the edge of the platform and lean over the third rail, placing themselves at the mercy of anyone who might be feeling a little testy—just to see if the train is coming. They aren’t going to make it come faster. The motorman isn’t going to get excited and speed up if they wave at him, but these people are all willing to risk their lives for a marginal level of information. They must need that bit of information badly, or feel that they do. I would like to get that information, too, but I stay glued to the back wall or a concrete pole. I choose, instead, to watch the faces of these data dummies. When they relax and smile, I move up to the yellow line.

Similarly, your employees, bankers, and investors crave every bit of information you can give them about your business. They need to know where the business is going.

DETERMINE YOUR READER

Now that I have you geared up to write your plan, there’s something very basic you must decide. For whom are you writing the plan?

As you can see from the pyramid chart, business plans are written for different readers and for different purposes. First, there’s the plan you write for yourself. That plan is useful because it will show you the bugs of your business on paper. Because if you can work them out on paper, you can save yourself some time and money. That plan doesn’t receive much peer review, though, and since you worked so darn hard on it, you won’t be good at catching its flaws or at criticizing it.

The second kind of plan is the one written for a corporation, such as the plan an IBM executive might write for his operating division. The peer review of these plans has a great deal to do with upper management’s perception of the writer of the plan. For example, if GE’s brass thinks the new president of their light bulb division is a golden boy based on the last thing he did, they are likely to be thrilled by the next plan he sends them for a project and will probably blindly approve the funding. That’s why so many divisions of large companies fail to follow up their first success with another—they become enamored of a hero.

The third type of plan is the kind you write for a bank to get a loan. You give your banker the plan and tell him you want to borrow $100,000. He calls you a couple of days later and says he really likes your plan and will lend you the money if you can deposit $150,000 in CDs to secure the loan.

I’ve often wondered, What if he didn’t like the plan? Would he ask for $350,000 in CDs? Bankers aren’t initially moved by business plans to fork over cash—they’re moved by collateral because all they stand to make on their deal with you is interest. Even if your business does extremely well, all the bank will get back is interest and its principal, so all the banker wants is to make sure that the bank gets that interest and principal. Period.

The most fun and valuable people to write business plans for are venture capitalists. Unlike corporations or banks, they aren’t looking for heroes or collateral; rather, they are looking for exciting new enterprises in which to invest. They are looking for a dream that can become a reality with their financial assistance. The business plan you write for a venture capitalist will be the toughest one you write, because in it you will have to show exactly how you plan to realize your dream.

Even though this book is about getting money from a bank for your small business, I’m going to spend some time talking about how to write a winning business plan for venture capitalists, because if you can write a great business plan for venture capitalists, the other plans—for banks, corporations, or yourself—will be easy to write.

STRIVE FOR AN ELEVEN

One day you make the big decision. You quit your job and go home to write the great American novel, the new Love Story or Godfather. You walk over to Simon & Schuster to collect your advance. How much money could you get? A hundred thousand? How about when the book is done? Let’s say the publisher loves it and gives you $2 million. That’s respectable.

The great thing about a business plan is you can spend the same amount of time it would take you to write a novel and, if you write a plan as good as the one I’m going to describe . . . well, that plan attracted 250 million of today’s dollars up front on day one! The sequel to the greatest movie of all time, Gone with the Wind, fetched $5 million up front in 1988. You can get several orders of magnitude more in up-front money by writing a business plan than by writing a novel, and, in many ways, a business plan is easier to write.

Most entrepreneurs are capable of writing a business plan that on a scale of one to ten would rate from five to nine. The problem is that to raise money from a venture capitalist or to get a loan from your bank you need an eleven. Average is not acceptable. Too many entrepreneurs shoot for a business plan that rates a five. You have to shoot for an eleven because you’ll never write one accidentally. A plan has to be a ten just to attract any money. A nine is a bridesmaid who is very sweet and attractive but doesn’t get married. An eight is also a bridesmaid, but she’s not quite as attractive . . . and so on.

So what’s an eleven? An eleven is a plan that attracts so many investors that you’re up all night trying to decide who you’re going to have to cut out of the deal. To be good is not enough when you dream of being great.

THE DIFFERENCES BETWEEN BUSINESS PLANS FOR BANKERS AND FOR VENTURE CAPITALISTS

The first thing to decide on before starting your business plan is what the reader needs to know. In each business plan you write, you should emphasize the figures that are important to the reader—the banker or venture capitalist.

We’ve already determined that a banker needs to know about collateral. He wants to know how the loan is going to be repaid. The venture capitalist, on the other hand, wants to know different things: Is the product going to sell like mad? Will customers arrive in droves? How much money am I going to make?

Another difference between bankers and venture capitalists is the way they gain control of the business’s operations via their loan or investment. Bankers build negative covenants into the loan agreement. For instance, if you don’t pay, they can fine you for every day the payment is late or call the loan or sell the collateral.

Venture capitalists will take seats on your board of directors to exercise control. If they’re really smart, they will also give you debt with warrants, which provides them with essentially the same checks the bankers have, i.e., negative covenants in the loan agreements.

Bankers love to run ratio analyses: They look at changes in various ratios over time. Venture capitalists like to look at the value of the stock over time.

Bankers want to see a full personal financial statement. Venture capitalists are more interested in knowing where you went to school and what your last job was. As you can see from the chart below, however, there are more similarities than differences in the business plans prepared for bankers and for venture capitalists.

BUSINESS PLAN DIFFERENCES

BUSINESS PLAN SIMILARITIES

1. Management Team

2. History

3. Product/Competition

4. Market

5. Industry

6. Manufacturing

7. Sales Forecast

8. Breakeven

THE GREATEST BUSINESS PLAN EVER WRITTEN

Most people collect normal things. I collect old business plans. Over twenty-five years I have built up quite an archive—not that anyone cares—of all the business plans that have launched significant companies. I have about 150 plans, including ones from Xerox, Scientific Data Systems, Venture magazine, Federal Express, Medical Graphics, Storage Technology, Shopsmith, and Pizzatime Theater.

See if you can guess which plan I think is the best as I describe the plan and the personality behind it to you. I mention personality because when someone reads your plan and tells you this or that is wrong with it, what they are really telling you is that you’re ugly. It’s very personal. They’re saying, You’re ugly and corrective surgery won’t help. A toupee won’t do it. Losing fifty pounds won’t do it. You’re just basically ugly!

And it hurts! But you’re very grown up about it, of course, and you say, Well, tell me, if I recast my financials, would I be able to be un-ugly?

You can’t separate the hero from the plan. What I like about my favorite business plan is that the hero wasn’t one of those engineer or MBA types. The business wasn’t high-tech or low-tech, it was no-tech. When he launched the business that raised $250 million up front (in 1989 dollars), he was twenty-nine years old. He had no business experience at all.

When he got out of school, he bummed around for about a year, and then he enlisted in the marines. He doesn’t sound like much of an entrepreneurial hero yet, does he? You can’t have a great plan without a hero, but a great hero can have a bad plan. That’s an important concept.

In the marines he flew solo reconnaissance missions over Vietnam. He came back to the United States, bummed around some more, and couldn’t figure out what he wanted to do, so he reenlisted and went back to North Vietnam! Would you invest in this guy? He sounds a little flaky.

He first wrote his business plan when he was an undergraduate at Yale, and his professor gave it a C. The professor wrote Good idea. Costs too much.

Our hero’s name is Fred Smith, and the business based on that plan is Federal Express.

Smith did have some money. He had about $3 million of net worth from his family, but he raised $100 million on the strength of his business plan and its opening premise: He was going to ship a package from Newark to New York—through Memphis. A package going from Fort Worth to Dallas would be shipped through Memphis, too. It sounds a little wacky. Before Federal Express, packages were delivered piggyback on passenger flight schedules. If there wasn’t a passenger flight from Chicago to Des Moines on a particular day, the package wasn’t delivered.

Smith planned to buy 27 airplanes and 3,000 trucks and to hire 10,000 human beings before he opened the door for business. That was a very expensive concept. He was going to strategically station the airplanes around the United States, and have them fly preassigned routes, pick up packages, and then meet in Memphis around midnight. At midnight the packages would be passed around to different airplanes and trucks to be delivered by morning. Memphis was the hub: everything came in through Memphis and everything went out through Memphis (Smith’s hometown, by the way).

On day one, Federal Express delivered eleven packages, but on day two the company saw a 33 percent growth in sales!

Fred Smith changed the concept of venture capital in the United States. Before Federal Express, the largest venture capital deal had been Digital Equipment Corp. (DEC). General George F. Doriot, a professor at the Harvard Business School, gave $70,000 to Ken Olsen of Digital Equipment. Today DEC is worth billions.

The Federal Express deal was different because there was no single lead investor. Venture capital deals had been usually one on one. But Smith convinced almost every venture capitalist around to get involved in Federal Express, and the success of his company boosted the fledgling venture capital industry into maturity. The legend of Fred Smith may have already grown beyond the truth, but the stories are so colorful that few people care to separate fact from fiction, and now he is a folk hero.

Smith got those venture capitalists involved because his presentation