When looking for a business loan, you need to have a few things ready BEFORE you apply.
- Business plan
- Financial projections
- Personal financial statement
Business plan – this is where you outline your business. What service will you provide, why do you think this service is needed. Who is your competition? What is your USP (unique selling point)? You also include information about you and your background. And why your background makes this solid business venture.
The beginning of a business plan is called the executive summary. This is one to three pages that summarizes the full business plan. Many lenders will ask for the executive summary first and if they are interested, they will ask for the full business plan.
Many people think you only need this if you are getting SBA loan, but a business plan can be a “living document”. You don’t just write it and put it in a closet.
You should review your business plan quarterly and see how well your business is doing. You can also make adjustments so that your financial projections are more accurate.
The business plan is also a good place to define who will be working for you, the task they will need to do and the qualifications needed.
As your business grows, so will your staffing needs. Or maybe you will find that one position overlaps another and you should reduce your staff or find other tasks for them.
The financial projections are very important to potential lenders or investors. Try to keep your numbers realistic. One of the biggest reasons a bank or financial institution will reject your loan or investment request is if the financial projections don’t make sense to them.
When making your projections, make sure that you are clear about where your numbers are coming from. Back everything up with facts or from your own real-world experiences.
Your financial projections should cover the following information:
Sales forecast – create a spreadsheet that covers at least your first year. Many business plan writers recommend you include a 3-year projection.
Cash flow statement – This should cover a year of your business. It should show how cash will flow in and out of a business. Be realistic about how your customers will pay you. Not all of them will be on time. You need to account for the ones that may need more time, or you may have to write off.
Also, keep in mind that banks like to see a lot of “liquidity” that’s why we always recommend our startups use an equipment lease to buy equipment instead of using their working capital.
Unsecured startup business loans are hard to get. If you have good credit, you will have more success in obtaining a personal loan. If you have bad credit you need to preserve your working capital as much as possible. You shouldn’t count on finding an unsecured small business loan.
If you are a startup you will find it easier to get secured methods of financing. Only because banks think startup businesses are the very high risk. They would rather wait until you are 3 years time in business before extending a loan to a new business.
The one exception I’ve found is the SBA program. But SBA loans require good credit and favor homeowners. Check other types of business financing here.
Expenses – you need to be realistic about how much it will cost to run your business. This is where a lot of businesses go wrong. You need to include everything. From your advertising expenses to your payroll. Don’t forget to include the cost of creating your product.
Assets / Liabilities – This statement is much like a personal financial statement. It list the assets of the business (like cash on hand, A/R, inventory, equipment or real estate purchased) along with the liabilities like loan repayments and accounts payable.
Income projections – this is basically your profit and loss statement. To create this statement you will need your sales forecast, expenses, and cash flow statement. The formula you want to use is Sales – the cost of sales = gross margin.
Break-even analysis – This document is very important for any business over 3 years of age and looking for outside financing. The break-even analysis is the point where your business expenses will match your sales volume. If your business is viable, you will soon start to see your revenue surpass your overall expenses.
Banks and investors like to look at this document when making their decision on whether or not your business is growing and not.
If you are looking for venture financing. Also, include an exit strategy for them to review.
Personal Financial Statement
Finally, a startup should include a personal financial statement (click here to download one we give to our clients).
This will show your lenders what you have available as collateral and what you will be investing into the business.