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Banking for a new business

Submitted by Dick McKenzie, SCORE Counselor

 

What does a “Lender” look for when considering a business loan to a new business?

There are four (4) basic questions a “Lender” needs to answer in making his or her decision.

1. What is the loan to be used for?

2. How much is the loan for?

3. How does the loan get repaid?

4. If repayment is not as planned, how does the “Lender” get repaid?

To answer the first two questions, the “Lender” is looking for a Business Plan. The key elements of the plan to include: type of business, the organization, a marketing plan, their competition and why the business will be successful; what is its niche or advantage over other types of businesses in the same market?

To answer the 3rd and 4th questions the “Lender” will want to review the financial information, which should include: 1) the borrower’s investment in the business, 2) a 24 month income and cash flow projection prepared by month and the assumptions used to determine the projections, 3) a pro-forma business balance sheet, 4) personal financial statement and 5) personal income tax returns for the past 3 years (including all schedules).The key elements that the “Lender” is trying to determine is the client’s ability to provide the necessary equity investment to start the business and necessary funds (personal and business) to operate the business until cash flow is sufficient to maintain its operation.

To cover the initial risk the “Lender” will be looking for collateral support to cover any potential shortfall. In addition to the business assets, support will normally be in the form of a personal guaranty supported by personal assets which may include a 2nd mortgage on their home, savings, CSV life insurance an/or marketable securities.

When meeting with the “Lender”, the “Borrower” should treat the meeting with the “Lender” as a job interview. He or she should have a short well rehearsed oral presentation answering the four basic questions. The “Borrower” should have copies of the information outlined above to give to the “Lender”. The professionalism in both the presentation and the information will have an impact on the time and effort the “Lender “will put into making a decision. The easier it is to review and understand the information, the easier it is for the “Lender” to make a decision.

As the “Lender” is not going to review the information at this initial meeting, volunteer to answer any questions either by phone or in person he or she may have after their review. Also ask for a time when you could expect to hear back from them. Prior to meeting with a “Lender”, you should obtain a copy of your personal credit report. If there is derogatory information; be able to address the reasons for its occurrence.

Many of the loans will relate to the SBA (Small Business Administration) ask for information and the requirements for guaranteed loans and direct loans. If your loan request is denied, make sure that you are provided a letter detailing the reason for the turn down.

For free business counseling, contact SCORE at (616) 771-0305 or email score@grandrapids.org. Visit their website at www.scoregr.org

 

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How to Decide on a Business for Me?

Submitted by Bob Cooper, SCORE Counselor

 

Deciding on the product or service that you can form into a business, starts by looking at yourself. What skills and interests do you possess? You are going to devote a lot of time and energy to the enterprise, so it is necessary that you enjoy doing the activity that will be your business.

For example, don’t decide to operate a restaurant just because you love to eat. You might even be able to make a super hamburger on the grill, but to translate that into a full time occupation of operating a restaurant, with no knowledge of the restaurant business, would be a mistake.

Therefore, the first job is to investigate you to determine your skills, interests and desires. The best of entrepreneurs love their chosen business, and are prepared every day to be challenged by the tasks that need to be done.

If you are presently employed, keep your present job while you start your new business. Calculate the amount of money it will take to keep you and your family afloat for at least six months. This is the amount of money you need in the bank before you should leave your present job.

Almost everyone starting a business needs support. That support may take the form of money; however the best support takes the form of an experienced entrepreneur with whom you can discuss your ideas. When you are starting a business a person with experience can be the best support system of all.

Once you have an idea for a business that you have an interest in, and that you feel you have the experience to excel in, you must determine the strengths and weaknesses of the competition. As part of your marketing effort, list all of your potential competitors and their strengths and weaknesses, and then compare your product or service to your list of competitors. Will you be better, cheaper or faster than your competition? In other words, why will your customers buy from you? It is important to recognize that the day before you started your business, all of your potential customers had the products and services that they needed from someone else. Then why should those customers, a day later, need your product or service?

The other side of your marketing effort is to determine who your customers are and how you will connect with them. Keep in mind that every person or company is not your customer. Make a list of the demographics that best describe your customers, and based on that list, determine how you will connect with them.

Do research on your product or service to determine how successful and needed it may be in the marketplace. The world will not beat a path to your door just because you are in business to develop customers, you need to market your product or service to your network of potential customers.

Be professional. You are planning to start a business and that business is a reflection of you, so treat the business and yourself professionally. You want people to know that you are serious, and that you will treat the business and your customers as a professional. That includes having business cards, a business phone, a business e-mail address and having a website on the Internet. Part of being professional is building a business plan and planning ahead regarding the management and operation of the business. Do your homework before starting a business.

For free business counseling, contact SCORE at (616) 771-0305 or email score@grandrapids.org. Visit their website at www.scoregr.org

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