Small Business Questions & Answers


Filed under Finance

Ask About How To Plan To Get a Loan

by Wannabee A. Debtor | May 20, 2012

Subject :Finances

Dear Toolkit,

How do I go about convincing someone to lend me money for my business?

Wannabee A. Debtor

Dear Wannabee A. Debtor,

In order to successfully obtain a mortgage, your real estate must have three legendary things: location, location, and location. But it also helps if the building looks inviting, has an interesting history, and maybe a few elegant trees surround it.

And so it goes with successfully obtaining a business loan: In this case, though, the three key ingredients are planning, planning, and planning—and it also helps if the plan includes some interesting history and a few attractive non-financial facts to round out the package!

Every small business owner is convinced that the enterprise will be successful and that investors can be persuaded by these convictions. However, to obtain financing, you will need to provide objective as well as subjective evidence that your business will succeed—and this evidence can take the form of a business plan.

On the most basic level, every potential lender or investor evaluates a business by looking at how the injection of cash will be used and how the money will either be repaid or result in a profitable return. Many of these questions may be answered by data contained in your business's financial statements and projections; however, lenders and investors also make more subjective evaluations of you and your company. These assessments may affect your financing requests even more than the objective numbers.

Additional evidence of future success for your business can sometimes take the form of contract commitments from existing or prospective customers, industry or professional opinions, and market research—even if it's informal testimonials. In your business plan or loan application, make sure to note any advantageous market trends, consumer appeal, management experience, retention of skilled employees, and availability of any special resources, e.g., a valuable patent. Identifying a lender whose strategic approach or special industry focus matches your business will also enhance the subjective appeal of your business.

Whenever you try to make your case that your business is a worthy investment, keep in mind that most lenders and investors are followers, not leaders, and the best evidence of a good investment will be your prior success in raising or contributing capital for your business. If you can show a strong financial commitment to the business, a meaningful personal investment, the appeal of your company will correspondingly increase. As a rough rule of thumb, most lenders will expect owners to have an equity investment of at least 25 percent of the total cost of establishing the business.

Your past business experiences, your expertise, and your managerial skills likewise play a crucial role in determining the appeal of your business. If you can establish a personal relationship with a particular financier, such as a local community banker, your past successes and business experience are more apt to be considered in determining the likely future success of your business. Use your personal resume, as well as letters of reference from community professionals and business persons, to help project yourself as a reputable, reliable, and creative business person.

Your business plan is your sales tool for raising capital. It must include your goals and strategies, your financial forecasts of how much money is needed and how it can be repaid, a description of the areas of opportunity you envision in the future, and an idea of how you plan to deal with the inherent risks of the business, such as technology, competition, or business climate.

Here's a quick list of points you may want to think about including:

  • a history of the business, financial and otherwise
  • a description of the product or service in its corresponding costs
  • a summary of your location, facilities, and equipment
  • information about management and key employees, if any
  • your evaluation of your total industry, your market, and your competitors
  • your overall marketing strategy
  • projected financial statements for 3 to 5 years going forward
  • your evaluation of the uniqueness of your business, plus details about areas of opportunity as well as risk
  • information about your key suppliers, if appropriate
  • how much capital you need and how you can repay it
  • some objective material about your industry, perhaps from trade journals, to give your lender a taste of the bigger picture.