Obtaining a loan is, among other things, a sales job. Many borrowers tend to forget this. An entrepreneur with an early-stage venture must sell himself or herself as well as the viability and potential of the business to the banker. This is much the same situation that the early-stage entrepreneur faces with a venture capitalist.
The initial contact with a lender will likely be by telephone. The entrepreneur should be prepared to describe quickly the nature, age, and prospects of the venture; the amount of equity financing and who provided it; the prior financial performance of the business; the entrepreneur’s experience and background; and the sort of bank financing desired. A referral from a venture capital firm, a lawyer or accountant, or other business associate who knows the banker can be very helpful.
If the loan officer agrees to a meeting, he or she may ask that a summary loan proposal, description of the business, and financial statements be sent ahead of time. A well-prepared proposal and a request for a reasonable amount of equity financing should pique a banker’s interest.
The first meeting with a loan officer will likely be at the venture’s place of business. The banker will be interested in meeting the management team, seeing how team members relate to the entrepreneur, and getting a sense of the financial controls and reporting used and how well things seem to be run. The banker may also want to meet one or more of the venture’s equity investors. Most of all, the banker is using this meeting to evaluate the integrity and business acumen of those who will ultimately be responsible for the repayment of the loan.
Throughout meetings with potential bankers, the entrepreneur must convey an air of self-confidence and knowledge. If the banker is favorably impressed by what has been seen and read, he or she will ask for further documents and references and begin to discuss the amount and timing of funds that the bank might lend to the business.
Small Print, Big Problems
Matt Coffin, founder of LowerMyBills.com, was less than two years into his venture when the markets began to
soften during the summer of 2001. Matt had just received a term sheet from a respected venture capitalist and
a most unwelcome call from his bank:
In the late 1990s we had established a million-dollar line through a big bank in Silicon Valley— which at the time was giving
out credit lines like candy. We had drawn down that line and now our cash balance was $750,000—less than what we owed them.
So they sent over what they call an adverse change notice. At the time I had signed the documents I didn’t even know
what that meant; yeah sure, just give me the million dollars.
Now I realize that an adverse change notice is a small print clause that allows the bank to demand immediate
repayment of the outstanding balance—pretty much at any time they felt like it. If you can’t do that, they can take all
the cash on hand and begin calling in assets. So now, instead of running my business and raising money, I was meeting with
lawyers and fighting with my bank just to stay alive. Over time, it became clear that they were basically trying to squeeze
me for more—that is, warrant coverage as a percentage of the loan.
Seeing how dire the situation was becoming at LowerMyBills.com—and how close the venture had been to
turning the corner—original investors came forward to help out. Investor Brett Markinson said that they all
understood that Matt was the type of individual to support in a down market:
Everyone, including myself, had gotten sucked into the idea of raising as much money as you could and spending it on
making noise. Matt had focused on raising as little as possible; he just kept his head down and concerned himself with
Since Matt hadn’t raised too much money and had maintained a lean infrastructure, he was in a good position to really
take advantage of the circumstances. While everyone else was cutting back or going out of business, Matt was able to rent
space at a great price and hire excellent talent at a great price.
With a couple of investors putting in their own money, LowerMyBills.com was able to pay off the bank and
secure the round. In the last quarter of that year, LowerMyBills.com posted its first profit, and in May 2005
Matt harvested the company for $330 million.