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What To Expect When Seeking Financing?
Character-While there are many tangible benchmarks a bank uses when it considers lending money, this less concrete standard may be the most important one in the long run. What it boils down to, according to DeFalco, is one question: are you an ethical businessperson? "Investors want to put their money with those who have impeccable credentials and references," write Lonier and Aldisert in an article on the Bizonline.com website. (1) "The way you treat your employees and customers, the way you take responsibility, your timeliness in fulfilling your obligations-these are all part of the character question."
Capacity -In contrast to venture capitalists, who are willing to manage a higher level of risk by investing private money, banks tend to be more cautious in making loans since they are lending FDIC-insured depositor money. Relationship managers are going to want to know, says DeFalco, whether you have the capacity to repay the loan. They will want to see evidence not only of projected income from the business, but of whether you have outside income and skills that may produce income should you need additional capital. The question that the banker must answer is this: will the way you use the borrowed money provide a sufficient stream of future cash flows to repay the loan in full and meet periodic principal and interest payments.
Collateral - Before applying for a bank loan, every business customer needs to have a plan to deal with this possibility of an unsuccessful business. Relationship managers are going to want to know if you can provide sufficient security (your home or other real estate, the cash value of life insurance policies or marketable securities) should your business be unsuccessful.
Capital -In its simplest form, your capital equals your net worth. "The reason for most small business failures is that they are undercapitalized," says DeFalco. "Well-capitalized businesses have staying power." Every business venture entails risk. At its most fundamental level, risk can be thought of as the probability that things don't go according to plan. Capital acts like a shock-absorber that allows your business to successfully operate through unexpected circumstances. The bank will want to see evidence that you have put your own assets at risk, writes the author of the article on the University of Maine Cooperative Extension website. "Knowledgeable lenders will not put money into a new business unless they have concrete evidence that you have personally made a sizable financial commitment to the business." (2)
Credit -A bank will take a look at whether you pay your bills in a timely fashion. To evaluate the level of risk it is undertaking, if you are seeking a relatively small loan, the bank will also use an instrument called a credit score. If you are looking for a major investment of capital, the bank will run a more complex credit analysis. In addition, a bank considering a loan package may also examine another set of factors. These are broadly termed:
Conditions - This item is often called the "sixth C." When a lender looks at your loan application, he or she may analyze issues that include the economy, the nature of your product, whether the bank has already invested in like businesses and local competition for similar businesses in your community. Although you have no control over your community or competitors, be prepared to answer some questions about how you will deal with these factors.
Putting your best foot forward: a basic checklist for every business client
When you meet with your relationship-manager (lender), he or she may ask you, at a minimum, for these items:
A. Three years business financial statements and/or tax returns
B. Two years of personal tax returns
C. A personal financial statement that has a detailed break-out of your personal assets and liabilities, or 'net worth'
D. Accounts receivable and payable aging
E. An interim financial statement for this calendar year-a bank may also want to see one for the past two years
Don't worry about the credit report-the bank will either pull a credit report or, for higher-end loans, perform a more extensive credit analysis.
Conclusion: Make Preparation Your Priority
Aside from character, the most important trait for a potential relationship-manager is another "c": commitment. A bank wants to know that you are willing to risk your own assets in making your business a success. If lenders are going to invest in a business, they also need to believe that you have taken the time, and have the supporting documentation to make the best and most convincing case possible. After all, investing money, time and thought in making the best sales pitch possible raises your odds, not only of getting the loan you need, but of having your business flourish.
The Business Plan and other Basics: A Special Appendix for Entrepreneurs
If you are starting up a new organization, then your bank is going to want to see a business plan, says DeFalco. As an entrepreneur, you may want to spend some time on the Small Business Administration (SBA) website (www.sba.gov). It is packed with useful information for start-ups, including an interactive tool for writing a business plan. Asserting that it is the responsibility of the businessperson to "sell" their business plan, the SBA authors advise that every successful business plan include an executive summary, market analysis, company description, organizational management, marketing sales management, service or product line, funding request, financials and appendix of supporting documents. (3)
Beyond financial projections, says DeFalco, Fox Chase Bank is particularly interested in how clients deal with barriers and competition in the marketplace, marketing strategy, business "territory" and the target market and to spend some time on the Small Business Administration (SBA) website. www.sba.gov
Notes
1. Lonier, A. & Aldisert, L. "The Five "C's of Credit" can be found online at http://www.bizonline-content.com/BizResourceOnline/harris/displayarticle.asp?clientid=4&categoryid=3&id=41
2. "Capital Sources for Your Business", Bulletin #3008, University of Maine Cooperative Extension, can be found at http://www.umext.maine.edu/onlinepubs/htmpubs/3008.htm
3. Small Business Administration. "Write a Business Plan" can be found on the SBA website at http://www.sba.gov/smallbusinessplanner/plan/writeabusinessplan/SERV_ESSENTIAL.html
Perhaps you are ready to venture into new waters and start your own business after dreaming about it for years. Or maybe you have built a successful organization already and want to add on a new product line or to move into a larger building. Whether you are established or beginning a new business, you are probably going to need capital to make your vision a reality.
In this article, we'll explain what you, the business owner, needs to be aware of when seeking a bank loan. We'll discuss the essentials of how banks make credit decisions. Then we'll give you an informal information checklist so that when you apply for that loan you have everything you need. One basic fact to remember- as Fox Chase Vice-President (Commercial Lending) William DeFalco says, the amount of supporting material you will need to provide depends on the type of business you own and where it is in its evolution.
In addition, there is a special section that appears below for the new owner or entrepreneur, where you can find some tips on how to strengthen your chances to get the funding you need and build a business that has staying power.
Five C's and a Sixth: The Basic Ingredients of Banking Credit
When you, the potential borrower, approach a relationship-manager (or lender) at a bank, they are going to be looking carefully at five factors and oftentimes a sixth, to determine whether or not you are credit-worthy.
Putting your best foot forward: a basic checklist for every business client
When you meet with your relationship-manager (lender), he or she may ask you, at a minimum, for these items:
A. Three years business financial statements and/or tax returns
B. Two years of personal tax returns
C. A personal financial statement that has a detailed break-out of your personal assets and liabilities, or 'net worth'
D. Accounts receivable and payable aging
E. An interim financial statement for this calendar year-a bank may also want to see one for the past two years
Don't worry about the credit report-the bank will either pull a credit report or, for higher-end loans, perform a more extensive credit analysis.
Conclusion: Make Preparation Your Priority
Aside from character, the most important trait for a potential relationship-manager is another "c": commitment. A bank wants to know that you are willing to risk your own assets in making your business a success. If lenders are going to invest in a business, they also need to believe that you have taken the time, and have the supporting documentation to make the best and most convincing case possible. After all, investing money, time and thought in making the best sales pitch possible raises your odds, not only of getting the loan you need, but of having your business flourish.
The Business Plan and other Basics: A Special Appendix for Entrepreneurs
If you are starting up a new organization, then your bank is going to want to see a business plan, says DeFalco. As an entrepreneur, you may want to spend some time on the Small Business Administration (SBA) website (www.sba.gov). It is packed with useful information for start-ups, including an interactive tool for writing a business plan. Asserting that it is the responsibility of the businessperson to "sell" their business plan, the SBA authors advise that every successful business plan include an executive summary, market analysis, company description, organizational management, marketing sales management, service or product line, funding request, financials and appendix of supporting documents. (3)
Beyond financial projections, says DeFalco, Fox Chase Bank is particularly interested in how clients deal with barriers and competition in the marketplace, marketing strategy, business "territory" and the target market and to spend some time on the Small Business Administration (SBA) website. www.sba.gov
Notes
1. Lonier, A. & Aldisert, L. "The Five "C's of Credit" can be found online at http://www.bizonline-content.com/BizResourceOnline/harris/displayarticle.asp?clientid=4&categoryid=3&id=41
2. "Capital Sources for Your Business", Bulletin #3008, University of Maine Cooperative Extension, can be found at http://www.umext.maine.edu/onlinepubs/htmpubs/3008.htm
3. Small Business Administration. "Write a Business Plan" can be found on the SBA website at http://www.sba.gov/smallbusinessplanner/plan/writeabusinessplan/SERV_ESSENTIAL.html
