Every business at some point will require outside financing; his generally means obtaining some form of bank loan. For many, this turns out to be a very aggravating and frustrating process. You may be financing a new business or simply be in need of seasonal financing, but proper planning will substantially enhance your chances of obtaining a bank loan. Additionally, you’ll learn more about your business through this process.
Various methods of outside financing include venture capital, an outside investor or bank financing (the most common method). Many banks offer both conventional and SBA loans. Talk with your banker to see which type of loan makes more sense for your particular situation.
Preparing the Loan Package
There are five components to preparing a loan package. I’ve broken the sections down below. Remember to customize each to your specific situation.
1. Financial Data
Usually two to three years of internal financial statements will be required as well as three years of projections on the balance sheet, income statement and cash flow statement. Other financial data may include prior year’s tax returns, financial ratios, information of historic growth rates, etc. Include any other information that will convince the banker of the fiscal soundness of your business. If your financial performance has been poor, emphasize the positive aspects of the business such as improved gross margins, increases in cash flows or key financial ratios.
Businesses that are start-ups will not have prior financial data. In these situations, projections and budgets are critical. These budgets and projections should be supported by factual information to support the fact that goals are creditable and not just “pie in the sky” wishes.
2. Industry Data
Including knowledge of pertinent financial ratios and industry statistics will further convince your banker of your creditability. Be sure to point out areas where you exceed the industry’s performance in a particular area. Sources for this type of information are trade associations and Internet resources. One such Internet source is First Research.
3. Ownership Information and Resumes
This information is important no matter whether you are starting a new business or trying to obtain funding for an existing business. Information about you and other principal stakeholders in the business regarding background, education, experience and capabilities is vital.
4. Financing Plan
In a well-written narrative format, explain the reasons for the financing request and the amount and repayment terms of the request. Identify the use of the loan proceeds. All of your loan package, including this section, should be tied together into a concise, financing plan.
Other information may be needed to substantiate your loan request. When requesting financing for a new business, always include information on marketing, management plans, industry background and predictions, and pro forma financial information.
If a working capital loan or line of credit is requested, you should provide information on how much funding will be needed during slow periods and how it will be repaid during peaks.
One important rule to remember is not to hide unfavorable information. A particular area where this comes into play is the strengths and weaknesses of the company. Such information should be fully disclosed, including how you plan to overcome the problem. Full disclosure will add to your professionalism, while the failure to disclose will undermine your creditability.
5. Secure a Second Opinion
Last, but certainly not least, is to have someone else look over your loan package; this includes a financial advisor or CPA. This person can offer an objective analysis of your efforts, point out shortcomings and make suggestions for improvements.
Do your homework before applying for a loan. Know your business, know your industry and know the answers to questions before they are asked. Having this information will greatly enhance the probability that you will be successful in obtaining your loan.
