Bank loan presentation;

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by Richard A. Patterson
Bank loans constitute a major source of outside
financing, particularly for smaller businesses. An im­portant
aspect in obtaining this type of financing is the
loan presentation, which unfortunately is not always
given the careful consideration and preparation it de­serves.
This is particularly true when the company is
making its initial contact with a bank.
The purpose of this paper is to develop the essential
ingredients for an effective loan presentation.
Proposals to security underwriters and other sources
of outside financing contain most of the elements of the
bank loan presentation. Many of the comments also
have relevance to "insider" presentations to top man­agement
who may be considering the allocation of
corporate resources among a number of investment
alternatives.
WHY A GOOD PRESENTATION IS IMPORTANT
The loan proposal is largely a selling effort by man­agement
designed to assist bank officials in judging the
desirability of making the loan and in evaluating the
relative degree of risk involved. The loan presentation
has three primary objectives:
1. It should outline the reasons the financing is
needed and what management expects to accomplish
with the funds.
2. It should project the future operations of the
business to help evaluate the ability to repay the loan.
3. It should exhibit management's talents and pro­fessional
abilities.
Considering these objectives, it is obvious that the
relative quality and completeness of the loan presenta­tion
can have great influence in determining whether
the loan will be granted. This decision is even more
critical in a tight money market. It is also apparent that
the proposal will be a factor in determining the degree
of risk and consequently the interest rate. The effec­tiveness
of the presentation can also influence the
relative severity of loan agreement terms such as main­tenance
of specified amounts of working capital or
equity, restriction on the payment of dividends, limi­tation
of officers' compensation, types and amount of
collateral, and requirements for personal guarantees
by owners.
If the loan is to be secured by accounts receivable
and/or inventory, it is common for a bank to require
monthly submission of aged trial balances of accounts
receivable and to insist on periodic physical inven­tories
or other types of inventory tests. Other burden­some
and costly procedures frequently required
include field warehousing of inventories and confirma­tion
of customers' accounts. A proper loan presenta­tion
emphasizing the strength of the company's
accounting procedures and internal control system,
and disclosure of the use of an audit by independent
accountants, can eliminate or reduce some of the
obstacles.
These more significant factors of bank financing
influenced by the loan proposal illustrate the import­ance
of a good presentation.
Of equal importance, preparation of the loan pre­sentation
will assist management in evaluating the
proposed financing. Insistence on a quality package
will force a rigorous examination of the company's
past and present performance and future plans.
10 THE QUARTERLY