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Financing Your Business: A One-Stop Guide!

Starting a new business or acquiring an existing one often requires arranging some level of financing through a bank loan. This need for extra cash will often mean going to your bank manager to present your business proposal. Since you will probably only have a single chance to convince a lender that your business model is a viable plan for generating profits, you should prepare yourself meticulously before the meeting to make sure you leave with what you want. This means putting together a solid business plan and loan proposal which is backed up by detailed monthly financial projections for the first five years. Additionally, you will need to gather up and present your historical financial statements and tax returns to persuade the lender that you are a trustworthy loan candidate, and that you are likely to provide them with a sound return on their investment.

What many loan applicants do not realize is that lenders use a strict set of assessment criteria called the “5 C’s of credit” when making a decision to accept or reject a loan application. If your proposal does not stack up in one of the five areas covered in the criteria, it is highly likely that you will fail to gain the financial backing you desire.

The “5 C’s” of Credit


CAPITALIZATION

(Will you have enough working capital to carry out your business plan?) – Included in your business plan must be proof that you will have enough liquidity to cover 3-6 months’ worth of running expenses from the moment that the business is started up or purchased. Lenders will be far from impressed by indications of financial imprudence or unrealistic projections regarding future running costs and how they will be met.

CASH FLOW

(Capacity for loan repayment) – Lenders will need to see a concrete timeline detailing where the money is going to come from to pay back the loan. Being opaque when it comes to dates and figures is a sure-fire way to give a lender cold feet and put the brakes on your plans. Make sure you cover all bases – work on possible exit strategies for the short- and long-term and think of backup plans for every possible eventuality.

CHARACTER

(The character and capability of the loan applicant) – While you are presenting your proposal, lenders will be looking for evidence of your management ability, commitment, sense of obligation to repay, personal credit history and business track record. You will need to work hard to show the lender that you have what it takes to be successful enough to put yourself in a position where you can repay the investment.

COLLATERAL

(pledged assets to protect the interests of the lender) – Most loans will require a down payment as a precondition for approval, but lenders also like to see that applicants have extra assets which can be transferred as an alternate means of repayment should things not go as well as expected and you cannot keep up with repayment dates.

CONDITIONS

(Market, geographic, industry, economic) – You will need to demonstrate that you have an in-depth insight into the current market conditions in the sector in which your business will be operating. Leave no stone unturned in your research as underestimating the knowledge and experience that your lender may have in your industry is a common mistake which leads to rejection.

What follows is a checklist of documents that are required in order to qualify for an SBA (U.S. Small Business Administration) loan. Depending on the specifics of your proposal, it is also likely that you will also be asked to submit further documentation to prove your credentials.

Business Loan Checklist

  • Loan Proposal/Business Plan – The 5c’s of Credit
  • Company Information — Name, company registration, tax ID number, certificate of ownership, earnings and/or cash flow projections for the next 1-3 years, and a copy of the proposed Franchise Agreement and current Franchise Disclosure Document (FDD).
  • Supporting Documents — Copies of purchase contracts, quotes and/or invoices, recent appraisals or other information relevant to your application (e.g. copy of existing or proposed property lease).
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