From bakers and brew masters to dentists and doctors, all business owners have one thing in common – they all need money to start, expand or continue their operations. Securing financing for a business can be one of the most overwhelming tasks an entrepreneur will ever face.
No matter the amount of money a business owner needs or the type of business they’re in, lenders ask certain questions and look at certain criteria when evaluating loan requests. By understanding how banks and lenders evaluate these requests, business owners can be armed with the information they need to successfully seek out and secure a loan.
What’s the Plan?
Lenders want to know how much money will be personally invested in the business, how much money the creditor is being asked to fund and how the money will be used. For a start-up company, owners will need to present more than the basics, such as a business plan. The business plan is the opportunity to answer these questions as well as the following questions:
- Who will own and operate the business?
- What experience and/or qualifications do you have to operate the business?
- What will the business sell?
- Who will the business sell to? Who is your target market?
- What is your marketing plan?
For a company that has already been in business two or more years, lenders will require current balance sheets, profit and loss statements, and interim balance sheets. It’s a good idea to bring personal tax returns and financial statements, as well.
To successfully secure a loan, lenders must be confident that the owner has a solid understanding of the industry, the product demand and the competition as well as the important tasks that come with owning a business, such as recordkeeping, cash flow management, inventory control and marketing.
Money Makes the Business World Go Round
Once the lender has reviewed the owner’s business plan and acumen, they will move on to the money. For a start up, the first question a lender will ask is how much money is needed to start the business and make it profitable? Most businesses need start-up money to provide working capital, including inventory, real estate, machinery or equipment and furniture and fixtures.
The next question is how much money will the business owner personally contribute to the business? Actual cash investment by the business owner is necessary. An existing business will need to present its current balance sheet to demonstrate how much has already been invested and how the money was spent. All of this information will be reviewed to determine how much actual cash investment remains after paying out expenses and providing a living for the business owner.
These questions will be evaluated by the lender to determine if the business will operate soundly, that the debt burden does not place unreasonable demands on the profits of the business to repay the debt, and that owners have enough capital at risk to keep them committed to the success of the business.
The Payment Terms
The biggest challenge business owners face when seeking a loan is showing the lender how and when they will pay the money back. This is the chance to prove to the lender that the business’ earnings will be enough to repay the loan.
To accomplish this goal, existing business owners will want to have historical operating statements to showcase prior sales, expenses and profits. Additional items that are helpful for existing and new business owners in making this case are projections of sales, expenses and profits for the next two to three years, and an annual budget of cash expected from sales. Industry and market research data can serve to back up your projections.
Borrowing money is all about convincing the lender that the business owner has the capital needed to succeed, the ability to repay the loan, the character and skill to implement the plan and the collateral to serve as backup. When entrepreneurs clearly understand the process and questions a lender will ask, they are adequately prepared to go out a secure a loan that will help their business prosper and succeed.