I’ve been fortunate enough to participate in the 100 Entrepreneurs Project, a program that provides valuable information from real business owners to wounded veterans, caregivers and spouses who want to start their own businesses. Bank financing is always part of the conversation!
Participants anticipate they'll get a bank loan. When I present funding options, I hate to be the bearer of bad news, but the reality is that it’s really hard, actually nearly impossible, to get a bank loan for a startup. Here’s what banks like to see:
· 2- 3 years of financial statements. Specifically, they need 2-3 years of operating profits. So the first thing you want to make sure you do is create your monthly profit and loss statement and balance sheet. Don’t know how? Outsource it, but don’t wait until you need the money to pull together invoices and re-create the wheel. You may think, “Who would do that?” I’ve seen it too many times to count. And don’t do this once a year at the end of the year. The bank will want to see any interim statements and accounts receivable agings or inventory reports.
· 2-3 years of tax returns. Again, you might be surprised at how many entrepreneurs fail to file all the appropriate tax returns, filing fees, payroll taxes, etc. The bank will order a certificate of good standing to make sure you have filed everything correctly and on time. Tax returns are especially critical for most new companies, as it’s likely you don’t have accountant prepared statements or you only have compiled statements. Bankers take comfort in the fact that if you told the IRS you made $X, you probably did.
· Personal Financial Statement. You will be required to personally guaranty the loan. Have a listing of all the assets you own by yourself and those you own with a spouse or others. If you have joint liabilities, you have to include all of them. The reality is that if your spouse doesn’t own any of the business, the banks can’t require your spouse to guaranty. BUT, if the assets you claim alone fail to give the bank the comfort they need, they can ask you to provide some enhancement, which is a round about way of adding your spouse.
· Projections. Depending on what you need the money for, the bank may require that you prepare some financial projections. If so, prepare at least two scenarios, most likely and worst case. The bank will be impressed that you are recognizing that things may not go as planned and that you’ve prepared for the possibility of a hiccup.
The list above is very basic and if you’re a start up with venture or angel money, you may not need to guaranty the loan. But I’m often surprised at how many people think they can get a bank loan with a great idea and a purchase order. It just doesn’t work that way.
If you need help making reasonable projections for your business idea, the Profitable Idea Coaching Program will not only show you how, but provide you with a model you can use to project all your business ideas and their impact on your financial outlook. We can also help you understand funding alternatives. Contact us to find out how.
All the best,
Amanda Weathersby, and Cynthia Flanders are Co-Leaders for the Profitable Idea LLC, which is now online!
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“The workshop provided me with insight that I have never heard before. I appreciate all the help, kindness, and willingness to guide me through the realistic view of my firm’s financial outlook. I will use the provided tools over and over.”
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