Saturday, September 11, 2010

Small Business Loans and the Plan to Obtain One

Busy with these !Image by micamica via Flickr
Eventually most small businesses need to get a business loan, whether to get the operating capital for a business startup or to finance an expansion.  The success of a small business depends on the funding it is able to arrange from various sources, which make sure a smooth cash flow. Finding adequate funding for small businesses is tough and time-consuming.  But whether you're approaching an institution or a friend for a business loan, the lender will have the same expectations. 

You can greatly increase your chances of successfully securing a loan by being ready to meet those expectations.  If someone asked you for a small business loan, you'd want to know:
  1. Exactly why he or she wanted the money, and
  2. What the chances were that he or she would repay the loan in full and on time.

So the key to getting a loan is preparation to get the right answer  for those two questions.First, gather together the documents that will help persuade the lender that a business loan is necessary and that you are a good risk.  Answering the first question means being  conversant with all the details of your business plan and being able to point to the relevant financial statements, documents, charts or graphs   that will help convince the lender that you need the amount of money you're asking for to do what you want to do.  Answering the second question means having already given some thought to the credit risk you represent to the lender and being ready to discuss his or her concerns.

These are the documents you will need:

Statement of your personal financial status - A list of your personal assets, debts, and other income sources to give the lender a fuller financial picture.

Past business tax returns- For established businesses, you need to give past business tax returns.  They'll give the lender a better idea of how your business is doing financially.

Financial Statements-  You will need to have historical financial statements for established businesses and a forecast of those financial statements.  You will need to include Income Statement, Balance Sheet, and Cash Flows.  Many small businesses will not have audited financial statements, but an accountants "review letter" that the historical statements conform to generally accepted accounting principles  would be helpful.

Collateral you have - Collateral refers to  tangible assets you are willing to put up to secure the loan. These assets might be:  equipment, stocks and bonds, a house, a car - something of value that you own. If you fail to repay the loan, then the proceeds from the sale of the assets are used for repayment.  You should offer statements and valuations supporting the values.

Resume -  This should detail your experience and background in the area you are securing funding for.  Because the success of your business is dependent on this to some degree, any potential lender will want to know more about you.  You will need one for each member of the management team.

Your Own Funding - How much money will you be putting into the business and your sources of the funding.

Credit Rating Report -  This assessment summarizes how well you pay back any current credit relationships.  While the banker will and can easily get one on their own, its important for you to know what your business and personal credit ratings are and correct any errors before the banker orders one on you.  If there are any issues, be upfront and give an answer for any negative history.
Business Plan - This shows the lender not only why you want a small business loan but what you plan to do with the money. The financial element the investor will key on are the Cash Flow Projections  with a focus on will you be able to repay the loan.  Your business's cash flow projections give lenders  financial data that they can use to assess this risk.

Now that you have all the documents you need to get a small business loan in order, the next step in getting a small business loan is to persuade the lender to give you the loan. You need to prepare in advance to make a winning small business loan presentation.  Approach the loan presentation as a sales meeting with a major client.  Generally, you will have an hour to meet with the banker.  You should use 20 minutes for the formal presentation and reserve the remaining 40 minutes for questions and answers that will probe details.  Your "formal" oral presentation consists about 10 high level slides covering the following points:
  1. Why are you seeking the loan
  2. Describe the pain you are trying to solve or the Market Opportunity and how are you going to offer the solution.
  3. How are you going to market the solution.
  4. Summarize your business model that is in detail in your business plan.
  5. What background and support do you bring to the table? Detail your qualifications and those of your management team if you have one and show them that you are capable of producing, servicing, or marketing your product
  6. Don't try to impress with your language. Using simple terms, describe your goals, your product or service, what you intend to charge, and how you can compete with the competition.
  7. A forecast showing your ability to pay,  when you expect to breakeven, and what you will do with positive cash flow.

You will have a business plan with you that will give details to your oral presentation.  The oral presentation is the pitch to get the investor to discuss, read, and seriously consider the investment opportunity.This is a big effort, but the reward is funding for your business opportunity.
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