Finances

Tips for Securing a Business Loan

By Jackie Gonzalez |  SBDC Consultant + Business Banker, ABC Bank

"CASH FLOW not REVENUE is KING! In commercial lending the focus is on the cash available to service the debt (cash flow)."

Jackie Gonzalez |  SBDC Consultant + Business Banker, ABC Bank Tweet

Commercial bank lending is based on risk.  The higher the risk the business poses to the lender, the harder it will be to borrow.  The following tips are designed to help you present your best case to a commercial lender and increase the chances of getting the loan your business needs. 

1.     Evaluate the business – In commercial lending there are specific criteria by which your lender will evaluate your business and intangibles that may apply.  View your business through the Lender’s eyes. Know your credit score, is your business profitable, are your customers paying on time,  do you have a good reputation in the community?  Google your business, see what others are saying about you.  This will be one of the first things your lender will do when they start working on your loan request. 

2.      Repair any deficiencies you can —  Knowing what the lender expects and knowing where your business might be lacking will help you repair these deficiencies before applying for a business loan. Explain any seasonality in your business, improve your receivables management, and ensure there are no mistakes on your business and personal credit report.

3.     Make sure financial statements are in order – Make sure your financial statements are complete, correct, and in order.  Include a balance sheet and income statement.  Consider having your accountant review your financial statement to anticipate any issues a lender may raise. Understand what your financial statements say about your company.  No one expects you to be an accountant, but you should be able to explain any significant fluctuations in revenues and expenses.  

4.     Be prepared to specify how much you want to borrow and what you will use the proceeds for – Will the loan be used to purchase new equipment or capital expenditures?  Expansion or hiring? Increase in inventory? Expansion into a new facility?  The lender is required by regulation to ensure that loan proceeds are being used for legal purposes, that’s why they are so nosey! 

5.     Develop a concise business plan – Develop a plan that clearly illustrates where your business is now and how a new loan will benefit your business.  Discuss strategy, goals, and tactics.  Provide background on management, both owners and non-owners, if applicable.  Discuss your competition, marketing plans, regulatory barriers, and cash flow projections. 

6.     Be prepared to put your own money in and to personally guarantee the loan – Lenders want to share the risk, not own it entirely.  If you are expanding into a new facility, purchasing equipment, or starting a new business, you will need to have some of your own cash into the project.  If you are not willing to invest in your business, why should the bank?  Anyone who owns 20% or more of the business will be required to personally guarantee the loan.  Make sure all owners/partners are prepared before applying for a loan.

7.     CASH FLOW not REVENUE is KING! – A business owner often looks at revenue when discussing how much the business is “making”.  In commercial lending the focus is on the cash available to service the debt (cash flow).  For instance if your business has $1MM in revenue but is paying out $950,000 in costs and expenses the cash flow is $50,000 not $1MM……………..BIG difference! 

8.     Speaking of…do not try to “hide” your businesses success at tax time – Business owners can often encourage their tax prepares to include as many deductions as possible to reduce their tax liability, but that can come back to haunt a business owner.  As a business owner you should discuss with your accountant the implication of the way you file your tax returns.  It may save you a few bucks in taxes but also may prevent you from obtaining a loan in the future.

 

There are more lenders than ever before willing to lend to small businesses and many lenders can be found with a simple online search, but do your research.  Some lenders (such as online or peer to peer) may be a quick easy fix but can also cost substantially more than working with a lender in your market. 

The Hidden Value of Crowdfunding

By Steve Imke, SBDC Consultant and Small Business Specialist

Traditionally, entrepreneurs had 2 options to raise funds to start their business. They could either get a loan or give away ownership to investors. Because of the risk involved in the early stages of a small business, founders had to give up large blocks of equity to entice an early stage equity investor. On the other hand, having to make interest and principle payments for debt financing can, at best, slow growth or even cripple a company during it’s fragile early stages. Enter crowd funding, a viable option to preserve equity and eliminate the need for debt.

In a real estate deal a few years ago, a builder I know needed to raise capital to build a new residential tower in downtown Denver. With a mock-up of the finished building, some computer generated images, and some floor plan layouts, he pre-sold many of the units at a discount to come up with the seed money he needed to get the project off the ground. Crowd funding shares many similarities to the strategy used by the builder to raise capital and validate the concept.

In many cases, a product based crowd sourcing campaign allows people to pre-order the product before anyone else. This campaign accomplishes several vital steps for a company still in its early stages.

1. It provides the company with the capital it needs to build the first wave of products without either giving away equity, or pay back principle, or pay the lender interest. These benefits occur when equity is most under valued and capital preservation is most needed.

2. It validates the hypothesis that consumers are willing to exchange cash for the product. Proving the value of the product is a major tenet of the business model canvas and for business that employ the lean start-up methodology.

3. It can raise to the surface demand for new and innovative products that might be hidden without a large number of investors actually seeing the product.

4. It attracts early adopters who become social activists, evangelizing the product to their networks and raising product awareness.

5. Tiered raises create excitement. Excitement can create a valuable feedback loop to further product improvement by exposing the product to early adopters, the people who are most likely to provide feedback.

6. It provides funding for a particular product and not the company. It is like a direct investment in a single oil well rather than buying the diversified portfolio of an oil company, such as Exxon.

In addition to pre-order campaigns, some crowd funding campaigns allow for micro ownership of an early stage company. This creates a whole new class of investors who can buy into companies before they become large and go public.

Before crowd funding, only accredited investors (investors with more than a million dollars in net-worth or investors that earn over two hundred thousand per year in wages) could get involved with ground floor investments. Prior to crowd funding, companies who tried to raise money from unaccredited investors would run afoul with the Securities and Exchange Commission (SEC). Crowd sourcing allows small investment levels that bypasses SEC oversight, opening the opportunity for micro investors wanting to buy into early stage companies.

These micro investors hope these businesses will grow substantially. They hope that these businesses will then give them a significant return on their investment when the company experiences a exit event such as being acquired or going public. Before crowd funding, even accredited investors would have to either invest large sums of money in only a few companies, which is very risky since there is limited diversity in invested capital, or find a venture capital fund to invest in and lose ultimate control over the specific investment allocations in new companies. With crowd funding, a small time investor with only a few thousands dollars can invest in dozens of hand picked companies and achieve investment diversification, a domain only previously available to venture capital principle investors.

Setting up a crowd funding campaign generally requires a good video demonstration of a sexy new product. Need a little help getting your idea from conception to a point where you are ready to begin a crowd sourcing campaign? No problem! Companies, such as Quirky can help get you there in exchange for micro equity stakes.

However, the funding of your venture may be the easy part. The real work comes when the new company or product gets funded. Now the owners must produce the product. To do that, they must now manage a long supply chain and learn to run a real business.

For more articles like this, visit Steve's Blog here!



Turn Your Financials into a Powerful Management Tool

How many of you have seen the ”Dave” Staples commercial? It shows “Dave” serving in all the positions of his company, asking “Dave” when “Dave” needs help.

As business owners we serve in so many capacities, it is difficult, if not impossible to do everything well. When we get pressured, we get stressed. Negative stress (yes, there is positive stress) can cause exhaustion and illness often follows. Most of us have experienced that sinking feeling when we realize we are “in over our heads.”

When it comes to our financials we try really hard to get everything not only in the system, but in the right bucket. Time is often our enemy. Invoicing gets behind which can cause a cash flow crisis. The ‘taxman cometh’ and we might not be ready.

Whether we do our own books or have them done, we are ultimately responsible for the result. Although responsibly managing the ‘books’ was probably not the reason we started our business, it will be one of the primary reasons we succeed in business.

It all starts with organization. Chaos has no place in a financial system. It starts with a Chart of Accounts that actually matches the business and more importantly you, the owner. The second step is imputing good information and most importantly getting the data in the right place. Once these steps have been taken, you can then produce various reports on a regular basis. Those up-to-date reports can provide the information needed to find the answers to the following questions and more:
  1. Are my products/services priced to make a profit?
  2. What is labor actually costing me?
  3. What are my true production costs?
  4. Are my overhead costs under control?
With this financial information, you are now empowered to make key strategic business decisions based on fact not hope. Having access to these answers put you in the driver’s seat of your business. That control alone can bring down your stress level. Take action today to get control. If you need outside help, get it. Make sure if you get help with your financials, you stay involved in the process. Learn what you need to know about financial management, so even if you choose not to do it yourself, you can inspect what you expect and know it is being done correctly.

This week’s tip brought to you by Nancy Barnett and the Denver Metro SBDC.
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