Cash flow. Most bankers will want to see cash flow statements as well as balance sheets and income statements for the past three or so years. It may consist of machinery, equipment, inventory or, all too often, the equity you own in your home.
Why do bankers seek collateral? They have no desire to own second-hand equipment or your house. Experience has taught them that entrepreneurs who have their own assets at risk are more likely to stick to a business than those who have none of their own assets at risk. They provide an added layer of protection for lenders. If your own capacity for taking on additional debt is shaky, a co-signer who's essentially lending you their creditworthiness may make the difference.
Marketing plans. More than ever before, bankers are taking a closer look at the marketing plans embedded in business plans. Strong competitors, price wars, me-too products, the fickle habits of the buying public and other market-related risks must be addressed.
Your banker and most other investors have to know that you recognize these risks and have well-thought-out ways to deal with them. Bankers like to stress the personal aspect of their services. Bank financing is most appropriate for up-and-running enterprises that can show adequate cash flow and collateral to service and secure the loan. Bankers are less likely to provide startup money to turn a concept into a business, and they're even less likely to put up seed money to prove a concept unless you have a track record of launching previous businesses with successful results.
Bankers prefer to lend to companies that are almost, but not quite, financially robust enough to pursue their objective without the loan. Their natural tendency is to be conservative. This is important to understand because it affects how and when you will borrow. When you apply for a loan from a bank, almost all the best banks expect you to submit a business plan along with your loan application. But don't think just because you have a plan, you'll get a loan. If you're a startup, your chances of getting a bank loan are actually pretty slim.
That's because banks are required by law to support loans with assets--called collateral --that protect the bank against a loan default. This legal requirement helps protect the banks' depositors against risk. And since most startups don't have the kind of collateral needed to support a business loan, most loans are made to existing business owners. But note that I said "most. What your bank does with your business plan once they have it tells you a lot about your bank.
Some loan officers barely glance at the plan, check a box on the loan form noting that they have a copy, then file it away, processing the loan application based solely on the financial information you provided in the application.
Other loan officers will read your plan and discuss it with you, adding value and building a relationship. These bankers can provide a lot more than just a simple loan approval. If you're fortunate, that's the type of loan officer you'll be dealing with. So let's discuss the parts of your plan that they'll look at more closely than others:. It guarantees a portion of the money that a bank lends you. If you're interested in getting an SBA-approved loan, you should know that you're almost always required to put up at least 30 percent of the value of the loan as collateral, meaning that the bank guarantees the other 70 percent through the SBA.
Doing so will require you to present a story that is both compelling and complete. Here are five things banks look for in a business plan. They look for tangible and intangible attributes. Substantiating past successes and owning up to weaknesses helps them paint a picture of who you are.
Bankers also want to assure that you and your team have the right mix of skills and experience. For example, if you only started your engineering firm a few years ago but you worked as an engineer for 20 years before that, then sharing your experience managing projects and people would be beneficial. Or, if you are more of a technician than a salesperson, demonstrating that you have an experienced salesperson who can help you grow the business could offset your relative weakness in selling.
You also should be able to prove the business is sustainable, especially without you. When a textile company applied for a loan, Middlesex bankers asked its owners about how the products that it would sell could be produced abroad and imported to the US for sale domestically, Bennett said.
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