From bakers and brewmasters to dentists and doctors, all business owners have one thing in common – they all need money to start, expand or continue their operations. Securing business financing 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 specific 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 startup, 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 already has been in business two or more years, lenders will require current and historical financial statements. The most basic set of financial statements includes a balance sheet and an income statement. Lenders may also like to see more detailed information for line items on the balance sheet, such as an accounts receivable aging schedule, inventory summary, fixed asset listing and debt schedules. Lenders also will like to see business owners’ personal financial statements and individual tax returns.
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 go roundOnce the lender has reviewed the owner’s business plan and acumen, they will move on to the money. For a startup, the first question a lender will ask is how much money is needed to start the business and how the business will become profitable. Most businesses need startup 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 in most instances. Current financial statements will demonstrate to the lender how much investment has previously been made in the company by the owners.
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 invested to keep them committed to the success of the business.
The payment termsThe biggest challenge business owners face when seeking a loan is showing the lender how and when they will pay the money back. To accomplish this goal, existing business owners will want to have historical financial 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 demonstrating to the lender that the business 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 secure a loan that will help their business prosper and succeed.
Certified public accountant Brenton Kembell is senior vice president of commercial banking at UMB Bank in Springfield. He can be reached at brenton.kembell@umb.com. [[In-content Ad]]
