Last week I wrote that the quality of your cover letter could make the difference between approval or rejection of your application for funding. The one or two-page, personalized document explains the ability of your venture to repay a loan, or for venture capital, the return on equity to an investor.
A cover letter is mostly subjective and sets the stage for the next document in your business plan -- the executive summary, that I sometimes call "Memorandum of Salient Facts." That is because the best ones will mirror the objective memorandum format that your loan officer presents to his finance committee.
Thus, your mission is to foster a trustworthy-enough friendship with the loan officer so that he will agree to show you what the bank's memorandum looks like. In that way, you can fine-tune yours to resemble the bank's and enhance your chances for approval.
Asking for this information is an honest and transparent part of your negotiations. Both you and the lender have the same objective -- to approve a good loan. Your relationship with the loan officer is the key.
You will need to know the range of acceptable underwriting benchmarks and what model the institution uses to match your financial ratios for cash equity to loan amount, debt service coverage, collateral liquidation value to loan amount, and the most important other ratios used in underwriting.
Ask how many months the finance committee expects it to take for a business like yours to breakeven. Find out when you are expected to show a profit -- and how much.
Getting these ratios and benchmarks close enough will make or break your deal. Furthermore, you do not have to be a financial whiz to understand them and explain why your business niche is unique if it deviates from the model.
It is important for you to internalize the numbers to withstand questions about them when you are asked. "I'll check with my accountant" is the wrong answer.
You have to know what model your lender uses for your key financial ratios and understand how yours compare. But also cite secondary sources when they better support your contentions.
During my commercial mortgage-banking career, for example, some of my institutional investors liked the Institute for Real Estate Management's data. But in addition to IREM, I also used Building Owners and Management Association's statistics when I financed office buildings. For retail, I used ratios from International Council of Shopping Centers. Likewise, the National Apartment Association and National Multi Housing Council are excellent sources to rental apartment complexes.
For non-real estate proposals, I found that many lenders and the U.S. Small Business Administration uses Risk Management Association's Annual Statement Studies, Financial Ratio Benchmarks. Regional libraries have RMA and trade association statistics in their research sections. You can also purchase a subscription.
Using trade associations' financial ratios adds credibility. If you own a restaurant, for example, the National Restaurant Association compiles the relevant data you need. The Encyclopedia of Associations list most trade associations, tells you the composite of their membership and provides contact information for its leadership. Many have local affiliates and allow you to attend a meeting for free as a prospective member.
You can also interview businesses that are similar to yours. Talk to franchise operators that sell similar products or services. They are used to getting contacted by prospective franchise purchasers and apt to be candid about their experiences and even their financial statements.
The memorandum of salient facts can be limited to one page because you already touched on the research and explained where the numbers came from in your cover letter. Moreover, the footnotes to your financial statements will explain the numbers in comprehensive detail.
In future columns, I will write about the "sources and uses of funds" and other documents you will need to raise capital for your business.
Jerry Chautin is a volunteer SCORE business counselor, business columnist and SBA's 2006 national "Journalist of the Year" award winner. He is a former entrepreneur, commercial mortgage banker, commercial real estate dealmaker and business lender. You can follow him at www.Twitter.com/JerryChautin
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