As business owners, we invest our experience and capital to service our customers, pay our employees and return a profit on our investments. Capital can come from the owner in the form of equity investments and also your first bank loan.
At a certain point, your business may need more investment to continue to grow. Ideally, financing lets you borrow the money without diluting your ownership of the business.
Here’s what banks and lenders are considering when approving your loan application:
- The business should have a good business plan with realistic projections. It’s important to show profitability but the figures should appear reasonable to the bank’s underwriting team who would see dozens of these a month. The business plan should include financial projections as well as a description of the business, your advantages, your weaknesses, and how you will compete among other things. There are lots of great templates that you can follow to produce a winning business plan.
- Lenders are looking for industry experience. The greatest indicator of future success is past success. Banks know that operators with extensive experience understand the nuances of the business and are best suited to run successful businesses.
- Lenders are looking for management experience. The ability to plan, lead and execute is directly transferable from one industry to another. Maturity and experience with people and processes usually transfer quite well. Success equates to success.
- You need to have capital. Except in rare circumstances, the bank is only going to loan a percentage of the funds needed. Not only do you need skin in the game, the bank is also looking for appropriate loan-to-value ratios. The capital required is dependent on the asset financed and varies from industry to industry.
- The business should have a cushion to absorb unexpected losses. 2020 and 2021 have demonstrated the need for a strategic cushion for unexpected losses. We saw many successful and loved businesses forced to shut down because they could not carry their overhead through the lockdowns.
- You need to have cash reserves to manage the business for six months. The bank will usually not lend operating capital.
- The principals of the business should have a good credit history. With an unknown quantity such as a startup, the lender will look at personal credit history as an indicator of business credit worthiness. The bank may ask for a personal guarantee.
- The lender will also consider the net assets the business owners have outside of the business.
There are a few programs such as the Canada Small Business Financing Program that can help businesses get credit with a minimum personal guarantee. There are application fees and the interest rate is usually higher than more secured loans however this program should be considered.
Let’s talk about your business plans and how we can help you prepare your business plan to get the funding you need. We look forward to helping you achieve your business goals.