If you are thinking that you need a loan to open a business – or to help your existing business achieve new goals – there are some steps that you can take ahead of time to ready yourself to apply for financing.
• Protect your credit score(s). Check your personal credit rating and reports. If you have an existing business, you may also have a business credit score to monitor. If you see any errors in either report, get them corrected. Know what factors can negatively impact your credit score and try to avoid any actions that might pull it downward. If there are reasons why your credit score is lower than is truly reflective of your ability to manage your finances, prepare a letter of explanation.
• Understand your needs and options. Different types of credit are appropriate for different types of needs. Sometimes putting together the financing for a project involves using several loans with different terms and, in some cases, even multiple sources. Banks are not the only potential source for business loans. For instance, in some areas, there are regional loan programs to support small businesses.
• Research lenders and schedule pre-loan meetings. If you already have a banker with whom you have a good working relationship, that is a good place to start, though, having a bank that you already work with is not a guarantee that it will be interested in your particular financing project. It is not uncommon for people to need to visit with several lenders before finding the right fit, i.e., a lender willing to work with you, who understands your needs, and is willing to work with the best options for your financing.
• Put together your balance sheets. If you are a pre-venture business or an existing business that has not yet developed much equity, this means your personal balance sheet (assets, liabilities and equity). If you are an existing business, you will need the business’ current balance sheet, plus an ending balance sheet for each of the past several years. Examine changes in your balance sheet over time and be prepared to discuss whether your financial position has been improving and how this loan will fit into that picture.
• Collect your profit and loss statements. For existing businesses, you will need your actual P & L statements from the past 3 years. You will also want to forecast your sales and expenses to see whether, with the new injection of capital and new debt service, you will still be able to cover expenses and hit the profit goal that you have set.
• Develop realistic cash flow projections. These should show the impact of the proposed debt structure on cash flow for at least a 3-year period as well as the impact of the investment into the business. Assess whether you will be able to repay the loan and cover other expenses every month. Make sure that the cash flow projections are tied to how the business will operate.
• Identify your break-even point. What will the business need to do in revenues in order to cover its fixed and variable expenses? A lender might also ask you to be able to discuss the break-even point on a particular product or service.
• Put together, or update, your business plan. In this context, the purpose of the business plan is to demonstrate that you have thought through where you are going with the business, your specific objectives, how you are going to operate it to achieve those goals, how the financing fits into that picture, how well you understand the relevant finances of the business, the market in which it is going to be competing, the challenges that are going to need to be overcome and that you have the management capacity to be successful.
At the Washburn SBDC, our advisors are knowledgeable about lending options and have tools to assist small businesses – and prospective small business owners – prepare to work with lenders.
Laurie Pieper, Ph.D.
Washburn University SBDC
America’s SBDC Kansas