How to ask for Loans

This is a long post.  You’re warned.

Look around you. Everyone walks around in a financial stupor.  Have you ever tried to start a conversation with a friend about how much they make?  Yeah, that’s difficult.  Let’s make it easier, have you asked a sibling exactly how much they made last year and what they are doing to save for the future?  No?  Let’s go even easier, how about your parents as they prepare for retirement (or maybe they’re retired)?  Haven’t discussed it with them either?  Why not?

Financial discussions are taboo to Americans.  We discuss finances about as often as we discuss sex with our parents (even then both discussions are equally comfortable).  Why is that?  Don’t we all (claim) we want to retire early?  If you don’t believe me, look at how many articles on many major news outlets discussing how difficult it is to retire at 65.  These articles don’t even include the people whose pensions have been destroyed by bankrupt cities such as Detroit and Central Falls, RI; see: In Plain Sight from NBC News.

So, we know it’s difficult to only discuss finances with friends and family, let’s see if you’ve talked with people you’re supposed to discuss money with: bankers.  When was the last time you went to a banker to have a frank discussion about money and how to ask for loans?  What — the last time you discussed a loan with the bank was for your mortgage?  Ten years ago?!?

As I’ve said, it’s easier to discuss embarrassing physical issues with your doctor (or Dwight Schrute:, than it is to discuss your finances.

Why is that?

I don’t know.  It shouldn’t be.  If you want to get ahead, you have to discuss your finances with someone.

So, we’ve established it’s difficult to discuss finances with others.  How the hell are you going to ask for a loan?  I’m not going to lie, it’s difficult.  It’s incredibly difficult.

Even before you can ask someone for a loan, you have to identify who to ask.  Why do you choose who you ask?  Do they have a successful business?  Do you ask family?  How about friends?  Maybe even coworkers (not the best idea)?

My first attempt to start a business was to purchase an established Laundromat.  (Please note: This is fail #1)  I negotiated the price, and tried (the easy route) of establishing a home equity line of credit (HELOC).  Turned out my house didn’t have enough equity, so I had to go the route of asking family and friends.

I literally made a list of my entire family and friends who I thought may have some money to lend.  I tried to be conservative when I estimated how much I thought they would be willing to lend and tried to come up with two times the cash I needed.

The first person I approached was my friend (and boss) at my construction firm.  He and I discussed finances and various investments on a semi-regular basis, so it was relatively easy for me to approach him.  I invited him to lunch (I paid).  At lunch, I had all my financial analysis of the Laundromat, showing monthly profit, annual profit, expenses, etc.

We sat at lunch, and even though we readily discussed investments, it was difficult to utter the phrase “I would like to purchase this Laundromat, may I borrow some money to do so?”  Really, really difficult.  And this was a guy that regularly discussed finances.  I got out of that lunch meeting feeling like “holy crap, that was difficult, how am I going to get through any more discussions?”  My friend asked me to do some follow up on the investment analysis before he would provide an answer.  Fair enough.

I then sat down with my cell phone, and a list of people to call.  One of my family friends is quite a jovial gent, easy to talk to and more than willing to discuss business.  I figured he would be a really good first call to make, so I dialed his number.

By the time the phone rang the first time, I was sweating.  By the third ring, I could feel sweat running down my back.  I had written my script, so I knew I didn’t have to improvise.  I was beginning to think I was lucky enough to talk with an answering machine

[damnit!! He just picked up!!]

My conversation went something like this:

Me: Hi John, how are you?
John: Liam!  Great to hear from you, how are things going?  What can I do for you?
Me: {thinking: Holy cow, already off script} Uhhh, great, I’ve got a question for you, not sure if it’s cool or not, but you’ve always said that if I ever needed anything, I could talk with you.  {good, back on script} Well, I’ve found an investment…I was wondering if I could borrow some money to purchase it?

The entire time I was talking with my friend, I distinctly remember thinking I was going to vomit and trying to figure the closest trashcan or toilet.

I don’t remember how the remainder of the conversation went, but we left it that if I was able to raise up to a certain amount of money, my friend would pitch in the difference so I had enough to purchase the Laundromat.

Great, first call down with a verbal commitment.  Score Liam: 1, Doubts: 0

Second call: My uncle who owns a few successful businesses.

Again, hoping for the answering machine, my uncle answered on the third ring.  “Liam, how are you?”  The conversation continued perfectly on script for the next two minutes while I described what I wanted to do, how much I needed (in total), and the finances of the Laundromat.  Then, at about minute 2.5, my uncle dropped the bomb “Liam, that all sounds great.  Before I can make a decision though, I would like your business plan, the financials for the Laundromat and updates as you proceed through the buying process.”

Me: “uhhhh…GREAT!  I’ll get that together for you and send it right off [thinking: What the?!  A business plan for a Laundromat???  Does it have to be more than you put quarters in and I take them out?  What am I going to do?!? <end of thought>].  Thanks Uncle.  I’ll be in touch with the information you need.”

So, what did I do?  Well, naturally, I turned chickensh!t and decided I would never be able to raise the funds for the Laundromat, so I stopped trying.  There were the regular nagging questions in the back of my mind: what if people stop using the Laundromat?  What if costs go up faster than revenues?  What if…what if…what if?

Score: Liam 1, Doubts: 5

This experience was a great learning experience for me.  I learned what made me feel uncomfortable, and because I didn’t have a proposal for how much and what terms I wanted, the conversations were a little stilted.

The second time I asked people for money was in the wake of the Great Recession and housing crisis.  I knew I wanted to purchase a rental property, I just didn’t know where or when.  Once I was convinced I wanted to start a real estate business, I approached two of my friends to see if they would commit to a loan, even though I didn’t have a specific purchase in mind.

Using several online calculators as well as some calculators that I developed, I knew that about $20,000 would be enough to get me started with one rental.  To cover my bases, I also applied for a larger HELOC.  I figured that I would have backup if one of my friends backed out.

Prior to meeting with my friends, I determined what terms would be a worst case scenario for me (aka: breakeven).  For this particular deal, my worst case terms were 6% for 5 years.  Rather than ask for the worst case scenario terms, I calculated payment terms that I wanted.  I figured they would negotiate so I would start with my preferred terms, which in this case were 5% fixed for 10 years.  Both of my friends accepted my proposed terms (their money is secured with some stock).

The second time I asked people for money I learned almost as much as the first time.  The five main take-aways I learned are as follows:

1) You need to know what terms are acceptable.  If you don’t get your preferred terms, you have to ask yourself if you want to keep looking for someone willing to lend at those terms, or if you will accept a counter-offer.

2) Present these preferred terms to the people you are approaching.  Offers are much easier to stomach if they are concrete.  Imagine if someone came to you and asked: “I would like to invest in this fixer-upper down the street, can I have some cash to do so?”  Your first response is a furrowed brow and the question “How much?”

Now, imagine if someone came to you and asked: “I would like to invest in this fixer-upper down the street.  May I borrow $5,000 at 5% for 10 years?”  That question is much easier to answer.  The person you’re asking either has the $5,000 or doesn’t.  If they do, the cash is probably languishing in a bank at sub-1% rates, so the 5% you’re offering could be 10x what their money would be making.

3) Have a plan.  After you’ve asked “I would like to invest in this fixer-upper down the street.  May I borrow $5,000 at 5% for 10 years?”, now think about adding “The house I intend to purchase needs to have some new carpeting, a good cleaning, some drywall patching and new paint.  I’ve done some cost estimates and I estimate it should cost $1,000 to replace the carpeting and an additional $400 for the other fixes.  I’ve done some research and the house should rent for $700 per month.  I anticipate the improvements will take me one month to complete.”

At this point, you’ve asked for the money (the really hard part), you’ve presented your preferred terms, and you’ve described how you plan to use the money.  Your lender now knows that you don’t plan to take a sweet vacation in Europe, they know you are going to invest your time in the project and that you have done some research so that (at least you) are convinced the investment is a good one.  Who would say no to that?

4) Do your homework and have confidence.  Do your homework so you can minimize your risk as much as possible.  By doing your homework, you will project confidence.  Sure your pitch might fail, but you’re not going to die.  I mean come on, what’s the absolute worst that can happen (so long as you don’t ask a loan shark)?  The absolute worst thing that can happen is that the person you ask says… “No.”  NBD.

5) Be ready for curveballs from the Lender.  If you seriously want to borrow the money, don’t get defensive (“I TOLD you already!”) and be ready to say “I’m not sure, but I’ll find out and get back to you.  Would you have time to discuss this loan next week?”  It’s not the end of the world.  Look to your lender as a mentor.  They want to protect their money, and that in turn helps protect your investment so long as you are open to their critiques.

In addition to my lenders and mentors, this group is also a sounding board for my Hare Brain Schemes:

Not my lenders, but friends helping me along the way (Highlife at the top of Tuckerman's in NH)

Not my lenders, but friends helping me along the way (Highlife at the top of Tuckerman’s in NH)

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