You’re ready to expand—now all you need is the funds to open your next store. If you’re like most business owners, your first stop will be your local bank. But before you go in and ask your banker to pony up expansion cash, give some thought to how lenders go about reviewing a loan request or line of credit and making a decision. Taking a little time to address your prospective lender’s needs—rather than just your own—will smooth the process on both sides.
So what does your banker need? First and foremost, he or she will want a thorough understanding of your company, both in terms of finances and day-to-day operations, and your industry—in this case tobacco retail. The better your banker understands your business model and position in the competitive landscape, the more comfortable he or she will be assessing your application.
Be prepared to discuss key issues affecting your business, including pending tax changes and local and state regulations affecting tobacco use and sales. Your lender will want to know what these mean for your business and how you cope—or plan to cope—with any impact they have on sales. When you discuss a business threat or anything that may be perceived as a threat to your business, you must offer an explanation of how you can mitigate or eliminate the risk. This demonstrates that you know your industry and are prepared to face and address the risks during the period of loan repayment.
Your lender will want to hear about the competition in your area and in the area where you intend to open a new store, as well as what competitive advantage you bring to the table—whether that be stronger assortment or better customer service. You may have a better good reputation in an area and an established customer base or be able to operate at a lower cost through inventory efficiency or better management of employees.
Your lender will also want to see that you have a strong sense of the financials involved. The very first question a loan officer is likely to ask is how many years your company has been in business. He or she will likely want to see between two and three years of financial statements or business tax returns. Lenders primarily look at two things when reviewing finances:
1. Revenue generating products and services: A lender will seek to identify which products and which customers are most important to your business and whether there are any trends likely to impact those products and customers in the future. Ideally, you will be able to show that you will retain the majority of your existing customers and attract new ones as well.
2. Company expenses: Lenders will look at your most significant expenses. Typically these include costs related to inventory, retail space, and employees. But insurance and other expenses may also be considered. Again, lenders will look to see if there are factors that may change the expense equation in the future. Perhaps rent on your building is about to increase or a pending tax could increase prices and drive customers away. These are the sorts of financial issues you need to be ready to address in your meeting with a lender.
Be prepared to walk your banker through the finances of your businesses. Because tobacco outlets operate on very low margins, the business is often difficult for an outsider to understand. It’s up to you to make the case to your lender about how profitable this business model can be. Also, be sure to be able to articulate how you determined the loan amount you need and the pace by which you can repay it.
While the points above address the needs of bank lending officers, all potential backers—including family members and friends—will be more comfortable investing in the growth of your business if you’re able to give them a working knowledge of the outlet industry and your position in it.
In short, potential lenders want to see that you know your industry—and know it really well. That sounds easy, but all too often borrowers neglect this fundamental part of applying for financing—and lose an opportunity as a result. Preparing ahead of time to address these points makes your lender’s job easier and increases your chances of getting the funding you need. •