Coast River Business Journal, January 2014
Kevin Leahy, Executive Director CEDR and CCC SBDC
Business lending is on an upswing, a positive sign that the economy continues to recover from the recession that started in 2008 caused by too much risk. However, people need to do their own due diligence before they talk to a lender, and they need to be thoroughly prepared for the process.
The first step in financing your business is to decide how much you need. If you are starting a new business, you should look to your calculations on business startup expense to help determine what you will need. It is imperative to sit with a business advisor as you prepare and “bottom up” this information.
If you have an existing business, you may have either short or long term borrowing needs. Your monthly cash flow projections should provide a good picture of your short-term needs. The price of a major item, such as a fixed asset or the purchase of another company, will dictate your long-term borrowing needs.
Sources of capital include banks, credit unions, federal programs from the SBA (Small Business Administration) and USDA (United States Department of Agriculture) , Business Oregon, CDFI ( non-profit community development financial institution) like Craft 3, economic development organizations, venture capitalists, angel investors, home equity, family and friends.
Another fast-growing source is Crowdfunding, which is the collective efforts of individuals who network and pool their money, usually via the Internet, to support the funding of a company. There are many forms of
Crowdfunding. (For more information just Google the term and you will see the myriad of options available to pursue.)
There are the 5 C’s of credit that every lender looks at:
CHARACTER... the character of the individual requesting a loan. Most bankers would agree that this is the most important of the five C's. If you are not someone to be trusted, then the bank doesn't want to deal with you no matter how good the deal is. Character includes the past credit history of the company and the principle individuals involved.
CAPACITY... What is your financial strength and track record? What do your financial statements (your history) show in the way of being able to take on more debt? What do your projections (of the future) show in the way of servicing that debt? The primary source of repayment is cash flow for short term loans (for example, taking on an inventory loan for a peak selling season, selling the inventory and repaying the loan) and profits and depreciation for long term loans.
CAPITAL... How much are you asking for and how much of your own money will you be investing? (You must be willing to invest money of your own.) When you are determining the amount of money you need, you need to have done your homework and know exactly what you need. Be conservative in the projections of your income and liberal in the projections of your expenses. You need to be able to document your need and the amount.
COLLATERAL... What is available to support the primary source of repayment? If you are not willing to sign your house over as collateral, for example, then the banker will interpret that as you not being 100% confident of the venture. If you are not willing to invest your resources, it is unlikely they will be willing to lend their depositor's resources. Collateral is the banker's "back door" source of repayment. Know what is available to pledge. Usually, a personal guarantee from the owner of the business is required.
CONDITIONS... What is the economy doing and how will it affect your company? What industry are you in? Who is your competition? How unique are your goods and services offered? Conditions also include governmental industry controls, pending legal action affecting the company and the believability of the company's marketing plan.
A critical piece of the funding process is a business plan. A business plan is your opportunity to demonstrate the uniqueness and viability of your business. Know that a well-thought out and laid out business plan may make the difference in getting funding or not.
Preparation is key. A business plan is mandatory. For the borrower(s), expect to fill out a loan application, personal financial statements on each borrower, three years of most recent tax returns, and a credit report on all borrowers (Normally banks are looking for a 700 credit score).
If the company is an existing entity, information needed includes current profit and losses (income statement & balance sheet), articles of incorporation, borrower’s aging of accounts receivable and accounts payable, two years of financial projections and three years of financial statements and tax returns.
Remember that your loan proposal is a snapshot of your entire business operations. Your lender will not want to read volumes upon volumes of documents – they will want to see clearly and succinctly that you know your business, that you can operate your business and that you can communicate your vision.
The key here is to not get overwhelmed by the process, but to focus on the end result. Our Clatsop Community College Small Business Development Center advisors specialize in working step by step with business clients in business plan and loan preparation, always FREE of charge and always CONFIDENTIAL.