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 email@example.com. Visit their website at www.scoregr.org