While there are numerous financing choices for small and medium sized owner-managed businesses ranging from asset-based financing to factoring to the SBA (Small Business Administration), most company owners are going to see a local bank first.

For most business people a visit with their banker is in the same category as a trip to the dentist--necessary, but not something they look forward to. Even though you have exactly the kind of company the bank advertises it supports, i.e., a successful, locally owned small business, you are wary and unsure of the bank's commitment to your company. Banks still possess a forbidding mystique that can intimidate even the most experienced business person.

Your meeting with Mr. or Mrs. Banker seems to go well. Three days later you get a call from the bank. The loan committee has denied your request. What do you do? Turn immediately to another source of funds? Shrug it off and figure that you will find a way to grow without outside money? No. Go back to a bank, a different bank this time, and go prepared.

You can try your original bank again, but first impressions are hard to overcome. (You never get a second chance to make a first impression.) The loan committee will be placed in the awkward position of overturning their initial decision. Better to make a fresh start unless you have compelling reasons to stay with your original bank. By turning you down the bank was making a pretty strong statement. Listen to it. That bank doesn't particularly want your business.

Bankers turn down thousands of company owners just like you every business day. Unfortunately, it's a case of what can best be described as "professional" lender meets "amateur" borrower. You probably see a banker a few times a year, if that. Your banker meets with potential borrowers every day of his or her career. That does not exactly make for a level playing field. Your meeting was a mismatch from the start.

GET BANKERS "EXCITED"

There are specific steps you can take to dramatically increase your chances of success in dealing with banks and other lenders. This may sound like an oxymoron, but you have to get your banker "excited" about your company. (An excited banker?) Only if he or she is truly excited and committed to your loan proposal can he or she sell it to the loan company. And it is a rare bank today that doesn't require committee approval on a business loan. Now, excitement for bankers is not your usual jumping up and down for joy excitement. It's something a lot more subtle.

Bankers are always on the lookout for solid companies to lend money to. That's their job. Bankers get excited about companies that stand out from the ordinary. You have to sell your banker on you and your company. Look at selling the bank as similar to the process you use to sell your products. You don't expect potential customers automatically to recognize the benefits of what you are selling without some education. Treat your banker the same way. Don't expect your banker automatically to see the gold hidden in your vision of the company's future.

Most loan proposals that come across bankers desks have a uniform similarity that reeks of lack of preparation and appear to shout "reject me, reject me! Reject me for lack of documented financial information, reject me for lack of a specific plan to pay you back. Reject me for not demonstrating how use of the bank's money can actually help my business earn additional profit."

Most entrepreneurs view visiting a bank as a necessary but unpleasant task.

The biggest reason most otherwise successful business people fail in their dealings with banks is that they are just not speaking in a language banks understand. Lenders speak a language that is foreign to the average company owner. This language is based on numbers and it uses these numbers to tell a story.

You can have the greatest story in the world, but if you are telling it to me in German and I speak only English, I am just not going to get it, much less be excited about it. Talk to the banker in language he or she understands and, most importantly, recognizes and respects.

When you put your financial information together what kind of story did it tell? You or your accountant probably rounded up the company's annual financial statements for the past few years along with an interim statement and submitted these to the bank. Unless you are in an exceptionally strong financial position (and if you are, you would not be applying for a loan), the information you give the bank is probably not enough to tip the scales in your favor as far as the loan committee is concerned.

Have you ever thought of why you never get a chance to meet with the loan committee? It's not because they are too busy. It's because the bank doesn't want non-financial issues such as people and personalities to cloud anybody's judgement. Your financial information has to stand alone. You are judged on your financial performance as you have given it to the bank. Period.

You can legitimately make the story you tell the bank substantially stronger by doing two things. The first is "recasting" your previous years' earnings; the second is including pro formas in your loan submittal package.

MAXIMUM EARNING POWER

Recasting earnings simply means redoing your financial statements to show what your business could have earned--its maximum earning power--in any given year. As a private business you try to minimize taxes. Taxes are based on income, so it's only natural that you tried to keep your income reasonably low. Great. But low income is not exactly what you banker wants to see.

Adjust your income statement to show what your profit could have been if the company hadn't paid for your car and insurance. Adjust for the money you spent to sponsor your son's Little League team. Adjust for the money you contributed to your spouse's favorite charity that benefited a good cause (and also helped maintain harmony at home). Adjust for the bonuses you paid to your key managers that were not required to be paid. In other words, adjust for everything that was not an absolutely necessary business expense. Look for expenses that could be eliminated, even though you might not choose to eliminate them, and still allow you to run your company successfully.

In particular, look very carefully at your own salary and the salary of any relatives on your payroll. As the owner you can take as much cash as you want out of the company. But if what you are taking in salary and bonuses exceeds normal standards for your industry, your company is showing less profit then it is actually making. This may make sense from a personal standpoint, but, again, this is not what you want to show your banker.

Lenders speak a language that is foreign to the average company owner.

No matter what bankers say, the first thing bankers look at is the annual profit shown on your financial statements. This is the benchmark of your success in their mind. In the mind of the typical banker, "Nice profit equals smart business person, low profit equals dumb business person." No amount of explaining can undo the damage a poor profit figure does to you image as a successful company-builder. Get your profit as high as you can before you meet with the bank.

For example, you are taking home a salary of $125,000 when $75,000 is more in line with what other owners of similar-size companies in you industry are making. More power to you, but if you add this $50,000 of "excess" compensation back into profits, your bottom line is going to look a whole lot better.

If all this sounds suspiciously like keeping two sets of books or like a lot of work, relax. It's perfectly legal since all your income is being reported. You are just showing what happens if you move income and expenses around on paper. As for the work involved, all that is usually required is making a few adjustments on the expense side of the ledger.

After you have recast your earnings to put your historical financials in the best possible light, it's time to look to the future. What are you giving your banker that show him or her what is going to happen to the company's finances over the next three to five years? What are you giving the bank to show how you are going to use their money, other than vague references to needing working capital? Probably nothing, if you are like the majority of company owners.

Banks don't want non-financial issues to cloud anybody's judgement.

That is a big mistake. Bankers want to know specifically what you are going to do with additional funds. Here you have another opportunity to set yourself apart from the competition--and you are literally competing with other borrowers for the bank's funds-- by showing the bank exactly how you are going to use its money. You are going to use its money to make more money. All bankers are capitalists or they would not be in banking. They want to see their capital grow and make more capital. Show the bank why your use of the money makes good business sense.

To do this, you need to develop a pro forma that projects your financial statements out over the next three to five years, depending on the term of the loan you are requesting. Lenders want to see a documented, believable future that puts their money to good use and shows them how they are going to be paid back. Show the banker how you are going to use his or her money to increase profits by opening up new global markets where there is a demand for your product or to introduce new products. Whatever it is, be specific.

MONEY MAKES MONEY

Bankers like to lend money when they are convinced that your use of their cash will generate more cash to you. Unless you can demonstrate that these borrowed funds will ultimately sow the seeds of additional funds in the form of company profit, don't bother your banker with a loan request. He or she will want to save the bank's money for customers who can put it to best use. And best use from a banker's point of view is always money making more money.

Pro formas use income, balance and cash flow statements to demonstrate your future financial performance. By being able to tie all these numbers together, you can build a future that shows the bank that you are in command of your business.

The bank probably has no question about your skill in making you particular product or providing your particular service. What the bankers are concerned about is your financial skills. All they know about you in this area of your life is what you show them in your loan application. By presenting a professional-looking package that answers their questions before they have a chance to ask them, you clearly demonstrate that you know what you are doing. You are speaking their language. You have told you story the best possible way. If a bank still refuses to bite, only then should you consider other sources of funding. There are many alternatives to bank financing, including personal financing, selling stock and other options. Which represents the best alternative for any business will depend on the specific circumstances of that business at the time financing is needed.

Among the options in personal financing are the owner's personal savings, taking out a personal rather than a business loan with a bank, borrowing against the cash value of life insurance, taking out a second mortgage on your home or other property you own.

'Nice profit equals smart business person, low profit equals dumb business person.'

Selling stock is a more involved process and is most commonly done at three points in a business's life: at start-up to provide launch capital, when extra money is needed to expand an established business, and when a company becomes so successful that there is a strong public demand to buy shares in it.

Other possibilities include loan brokers and venture capital markets. A good loan broker can raise both short- and long-term financing for a qualified business in a number of ways. However, this financing may be more expensive than conventional bank financing because the broker gets paid a fee or commission. Venture capitalists invest in companies in exchange for a percentage of ownership. The obvious downside ther involves giving up some control.

Robert A. Woods is chairman of Woods Capital Corp. in Park City, UT. He has over 20 years of experience in financing small and medium-size businesses. He is happy to answer readers' questions about financing their business and can be reached at 1-800-892-7707.