Unless you start a business with millions of dollars in the bank, then you're likely in the situation that most people are in. You've had to work hard, with very little capital, to build your business to what it is today.
You've also reached a point that you cannot seem to get to that next level of growth. You've realized that all of your funds are tied up in receivables and inventory, and you do not have the funds you need to realize your vision. That new product or service that you know will be a smash hit, you just need the funds to help you develop it, or to assist in the initial operating costs until it gains a footing.
Many business owners have faced this problem and the first place they go is to their banker. As a business owner, you have passion, vision, and a strong commitment to make this project a reality. The banker is always the best first stop for financing. They already understand your business, so that is a good head start. Although the banker knows your business, and loves your enthusiasm, they also require some facts. Those facts come in the form of three things.
These documents are as much for you, as they are for your banker. They provide a clear overview of the project, the financial projections supporting that view, and the expected returns over the long term.
The business plan doesn't need to be complicated, but it should include as much information as possible. It should tell a story to someone who isn't familiar with your business. The good thing about a business plan, is that once you write one, you can use it as a backbone for any future work.
As for the Income Statement and Cash Flow, these go hand in hand. Once you have one, you can more easily get the other. As I'm sure you are aware though, Income doesn't necessarily equal cash in the bank, and expenses don't always equal a cash payment. There are timing issues that need to be considered, such as when your customers might pay you if you offer terms, or the terms that you have on your payables.
First devise a Pro-Forma Income statement using Generally Accepted Accounting Principles. This should try to predict what your actual income statement will be at the end of the year, so use the same practices that you normally do. From this Income Statement, you can model your cash flow, depending on the nature of your business will depend on the complexity. Certainly a manufacturing business has more complex cash flow requirements than a straight forward professional services firm.
When devising a Cash Flow Statement, you will need to consider the following items.
When all of these have been properly laid out, and you're ready to move forward, you then need to review the figures and ask yourself, what are the risks? As with all investments, there is a risk of failure. You will need to also run comparative models determining a range of potential conditions, including a "worst case scenario". With this information in hand, and hopefully a still positive cash flow result, the bank will be much more comfortable arranging financing.
What the bank will look for from you when making it's financial decision is as follows.
You will also need to be prepared to pledge a personal guarantee for the loan. This is a standard practice and is not to reflect any lack of trust or belief in the ability of the company to repay the loan. It only serves to protect the bank so that the business owner will not decide to simply walk away, quit, or otherwise change his personal involvement in the business while the loan obligation remains outstanding. Simply put, if you are fully committed to the business, and you truly believe that your plans will be successful, then you should have no concerns in signing this security agreement.
Bank Financing is relatively easy to get, so long as you understand the position the banker is in. They want to give you money. It's their job to give you money. The easier you make it for them, the better your chances are that they will go the extra mile to secure the future of your business.
With good planning, solid facts, and a well presented financial forecast, it should be a simple matter to secure the funding you need.
Steve Collin - President - Arkana Financial Group.
You've also reached a point that you cannot seem to get to that next level of growth. You've realized that all of your funds are tied up in receivables and inventory, and you do not have the funds you need to realize your vision. That new product or service that you know will be a smash hit, you just need the funds to help you develop it, or to assist in the initial operating costs until it gains a footing.
Many business owners have faced this problem and the first place they go is to their banker. As a business owner, you have passion, vision, and a strong commitment to make this project a reality. The banker is always the best first stop for financing. They already understand your business, so that is a good head start. Although the banker knows your business, and loves your enthusiasm, they also require some facts. Those facts come in the form of three things.
- Business Plan - A business plan outlines all of the main points of your new project, including the internal requirements, talent and schedule. In addition, it covers your market knowledge, current strengths, and the competitive landscape.
- Pro-Forma Income Statement. You need to have a solid understanding of your current business and how this new project will enhance your profit margin over the long term.
- Cash Flow Forecast - Even more important than the above, the Cash Flow is all about how you are going to pay for it. The Income Statement will not include the $500,000 in equipment you need to purchase, but the Cash Flow will. Where will this money be coming from. Presumably, the bank. They are keen to see how this money will be put to use, and when the returns will be derived to both pay back the loan and to deliver profits into the hands of the shareholders.
These documents are as much for you, as they are for your banker. They provide a clear overview of the project, the financial projections supporting that view, and the expected returns over the long term.
The business plan doesn't need to be complicated, but it should include as much information as possible. It should tell a story to someone who isn't familiar with your business. The good thing about a business plan, is that once you write one, you can use it as a backbone for any future work.
As for the Income Statement and Cash Flow, these go hand in hand. Once you have one, you can more easily get the other. As I'm sure you are aware though, Income doesn't necessarily equal cash in the bank, and expenses don't always equal a cash payment. There are timing issues that need to be considered, such as when your customers might pay you if you offer terms, or the terms that you have on your payables.
First devise a Pro-Forma Income statement using Generally Accepted Accounting Principles. This should try to predict what your actual income statement will be at the end of the year, so use the same practices that you normally do. From this Income Statement, you can model your cash flow, depending on the nature of your business will depend on the complexity. Certainly a manufacturing business has more complex cash flow requirements than a straight forward professional services firm.
When devising a Cash Flow Statement, you will need to consider the following items.
- What is your current cash flow requirements for day to day operations?
- How much capital will you need for your project?
- When will you need it by?
- How much are you expected to make with this project?
- What is the expected timing of this profit (when will the returns, start, and how long will the last?
- What are the increases to regular operating costs?
- Can you afford the additional interest costs/payments prior to the investment producing a return? (this helps to protect the bank in that if the project were to be a complete failure, that the ongoing operations can still be maintained. It's all about risk management.
When all of these have been properly laid out, and you're ready to move forward, you then need to review the figures and ask yourself, what are the risks? As with all investments, there is a risk of failure. You will need to also run comparative models determining a range of potential conditions, including a "worst case scenario". With this information in hand, and hopefully a still positive cash flow result, the bank will be much more comfortable arranging financing.
What the bank will look for from you when making it's financial decision is as follows.
- Do you understand your business?
- Do you understand your market?
- Is your business current profitable? Are costs under control?
- Are the debt rations reasonable? Make sure you are not over leveraged.
- Do the projections make sense? Are the numbers reasonable?
- Do you understand the nature of the financial impact of this financing.
You will also need to be prepared to pledge a personal guarantee for the loan. This is a standard practice and is not to reflect any lack of trust or belief in the ability of the company to repay the loan. It only serves to protect the bank so that the business owner will not decide to simply walk away, quit, or otherwise change his personal involvement in the business while the loan obligation remains outstanding. Simply put, if you are fully committed to the business, and you truly believe that your plans will be successful, then you should have no concerns in signing this security agreement.
Bank Financing is relatively easy to get, so long as you understand the position the banker is in. They want to give you money. It's their job to give you money. The easier you make it for them, the better your chances are that they will go the extra mile to secure the future of your business.
With good planning, solid facts, and a well presented financial forecast, it should be a simple matter to secure the funding you need.
Steve Collin - President - Arkana Financial Group.
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