Without sufficient working capital, you risk putting your operations in jeopardy, particularly if you're experiencing rapid growth or fluctuating seasonal sales. Don't wait until your cash runs out before you start thinking about how you'll get the working capital you need to keep your company healthy and growing. The first step is to be well prepared when you approach a financial institution for this vital funding. To help ensure your loan proposal is accepted, here are some essentials to consider before you visit a bank:
Be ready for questions
Building confidence also means being ready for questions from your lender. Although you may have most of the answers in your business plan, here are some common questions that may come up during your interview:
- Do you know exactly how you would use your working capital and gain from it?
- How will your company survive if a founding member were to leave?
- Why have you chosen to operate as a sole proprietorship, partnership, corporation or co-operative rather than another legal form?
- Do you know what your competition is doing?
- How well do you know your industry?
- Do you have contacts in your industry? What is your relationship with them?
- What have you done in the past that will help guarantee your success in this venture?
- Is there a prominent businessperson in your region who will act as a reference for you?
- Do you foresee problems getting paid by clients?
- Do you have someone who will endorse your project?
- Why are you visiting this particular bank?
Write a convincing business plan
Keep in mind that you're convincing lenders, investors and shareholders that you have a credible company and that you'll use their funding well. A good business plan is basically a written document that describes who you are, what you plan to achieve and how you plan to overcome the risks involved to provide the returns anticipated. Avoid pitfalls such as being overly optimistic about forecasts, masking financial difficulties or failing to provide adequate information on your management team.
Here are some rules of thumb:
- Be sure your plan is a concise and structured document.
- Include a business proposal that addresses who your customer is, what business are you in exactly, what you sell, and what your plans are for growth.
- Show how you will use the financing: to increase inventory, for marketing expenses, for research & development and to export.
- Ensure you have a unique selling point that addresses, for instance, how your goods or services will appeal to customers.
- Include a market analysis with information such as your target market, customer demographics, competition and distribution methods.
- Provide key competitive information such as their weaknesses and strengths.
- Show your company's organizational structure and management roles.
- Include information on how you plan to recruit and maintain your employees or handle outsourced work.
- Do an assessment of the company's needs with regard to premises and capital goods (such as machinery and technological equipment).
- Include key financial data, such as:
- Personal and business net worth: equipment, facilities, buildings, investments, your house, inventory, or customer accounts to secure your loan.
- Past credit history to gauge your reliability.
- Financial projections for at least 2 years.
- Cash flow forecasts.
- Show legal structure issues such as taxes and liability concerns.
- Include an executive summary.
Show that you're proactive
Before you go to a financial institution, make sure you've determined the amount of loan you need, the type of loan you're looking for (remain open to other suggestions from your banker) and the interest rate you're expecting to pay. Also be clear on the repayment schedule you're seeking (remember, some banks are more flexible, offering deferred initial payments or variable repayments based on your seasonal income), the security you're willing to offer and the investment you're willing to make. A rule of thumb is to not show up at your bank asking how much money they can lend you. Instead, arrive with clear figures in hand and use your negotiating skills to get what you need.
Build confidence about your expertise
When you're approaching a financial institution, you need to instill confidence that you have the experience to run your business successfully. A bank is unlikely to finance your project if it's outside the realm of your expertise. However, you can earn more confidence by showing that you are able to strike strategic alliances with companies that can complement your know-how. For example, if you're designing furniture then you can could partner with a manufacturer to produce the product. Alliances are an ideal way to show that you can achieve better market penetration, increase your range of products and services and ultimately grow your company. For instance, you also could demonstrate how you could tap into another company's distribution network or achieve economies of scale.
Be sure you give sufficient background information on your strategic alliance partners and consultants. Your banker will also judge your company's strengths on the quality of your alliances.
Show your personal finances are in good order
Include a report on your personal finances that covers your recent history; this enables banks to see if you have the personal security to support your loan application. When you apply for your first few loans, banks require personal security as an additional means of covering the loan in the event that you should be unable to fulfill the obligations. Personal security requirements vary from personal guarantees to the use of personal assets to secure the financing.
When a loan is renewed, try and negotiate with your banker to release your personal assets as collateral and replace the security with business assets. Even though the loan is for your business, personal bankruptcy, late payments, or unpaid bills can prevent you from obtaining an additional loan.
If you had problems in the past, be upfront about them and show how you will correct the situation. Before applying for a loan, check your record with credit agencies such as Equifax, TransUnion or North Credit bureau. You may have a poor rating that you are totally unaware of, and for which you are not even responsible.
Know your business collateral
Lenders often require security for a loan in the form of personal or commercial goods. Long-term loans are usually guaranteed by long-term assets such as buildings or personal property. For lines of credit or demand loans, security may consist of short-term assets such as customer accounts or inventory.
Lines of credit are usually based on a percentage of the accounts receivable and inventory of the business. A credit line generally must not exceed 75% of the accounts receivable under 90 days. Financial institutions usually lend from 25-50% of the value of goods purchased from suppliers (finished products).
Get expert help on financial planning
If you're applying for financing, BDC Consulting can also help you with financial planning. Your financial plan will help you determine:
- How much investment or financing you need, and when you need it
- When you can expect your business to be profitable
- Realistic sales targets
- Cost and profit estimates
- How to meet your short- and long-term obligations
- Strategies for managing and sustaining growth
- Ways of tracking your progress, so you can adapt as necessary
