As a banker I am always fascinated by how people present themselves. People come into a bank and demand a loan from someone they have never met! I’m sure this strategy might work in some cases over the short-term, but if you look at any successful real estate investor over the long-term then you will also see multiple lenders that have supported this investor for a very long-time.
When Developing Your Pitch You Want to Address the Five C’s of Credit
Banks want to put their money with clients who have the best credentials and references. The way you treat your employees and customers, the way you take responsibility, your timeliness in fulfilling obligations – that’s character.
What is your company’s borrowing history and track record of repayment? How much debt can your company handle? Will you be able to honor the obligation and repay the debt? There are numerous financial benchmarks such as debt and liquidity ratios that banks use before advancing funds.
How well capitalized is your company? How much money have you invested in the business? Banks want to see that you have a financial commitment; that you have put yourself at risk in the company.
What are the current economic conditions and how does your company fit in? If your business is sensitive to economic downturns, the bank wants to know that you are good at managing productivity and expenses.
While cash flow will nearly always be the primary source of repayment of a loan, bankers look at what they call a “secondary source of repayment.” Collateral represents assets that the company pledges as an alternate repayment source for the loan. In other words, hard assets. Most collateral is in the form of real estate and office or manufacturing equipment. Your accounts receivable and inventory can also be pledged as collateral. Unless you’re a business with a proven payments track record, you will almost always be required to pledge collateral.
In summary, write a letter that addresses all of the above to any existing and potential lenders (and/or investors). This will dramatically increase your negotiating power and your success rate.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.