Before you decide to apply for business finance, it’s important to have all the information at hand. The more organized you are, the better your chances of success. Before you go and see your bank manager, prepare the following:
- How much it’ll cost to either buy or set up the business, including what stock or equipment you’ll need.
- How much you think you’ll need to borrow, and how much you’re contributing yourself such as savings, assistance from family, or any investors you already have on board.
- What you’ll use to secure the loan if anything. Borrowing against your house is common, but there are other options available.
- How you intend to repay the loan, ideally from the extra profit the business will make from the extra capital you’ve borrowed.
- If you’ve got any other debt, or any other sources of income you can use to repay the loan.
If you can provide the bank with that information at the start, they’ll be reassured you’ve thought carefully about the basics.
What do you need to borrow?
You’re looking to borrow as little as possible, but enough so that you won’t have to borrow again for a while. It’s better to add a small buffer now, which you may not require, than going back to the bank and explaining your estimate was wrong. So provide details of everything that you need funds for – like stock, equipment, set-up costs, and working capital.
You also have to show how much of your own money you’re planning to use. For example, if you were buying a business and it cost $500k to buy, and you have $200k of your own money, you need to borrow $300k.
If you need $300k for new equipment, the bank will want to know your existing assets total so they can get an idea of what percentage of assets the new loan takes. Having $1m in assets and wishing to borrow $200k is better than the other way around.
How will you service the loan?
It’s a great idea to show that whatever you borrow, you have the ability to pay it back. No bank wants you to default on a loan. It’s easier for everyone if you provide:
- A Personal Statement of Financial Position. This outlines everything you own as well as what you owe, and your income and living expenses (including those of your partner if you have one, or any dependents).
- Details of how much you intend to take from the business as a salary or wage, and if you’ve got another source of funds in reserve.
- A business plan. The bank will possibly want to see it before they’ll consider lending you any money.
- A cash flow forecast. Your bank will possibly request a cash flow forecast.
Security for the loan
The bank likes to know it can get its money back. So you often have to provide some kind of security, such as real estate or business assets. You’ll likely have to include a registered valuation for any property security. For a commercial property, a copy of the lease is handy.
How will you run the business?
In addition to your business plan, you’ll also want to:
- Provide details of who owns the business, whether you’ll be working in the business full-time, and who else is involved in management.
- Provide details of the operational structure. Are you a corporation, partnership, sole proprietorship or trust?
- Show that you’ve had professional advice from your financial advisor or accountant. They also like to know you’ve sought legal advice.
Provide a resume
Show what experience you have in both your industry and in running a business. Include:
- Past business experience.
- Details about any business partners and key personnel.
- Training and support you’ll receive.
- Any qualifications that relate to your industry and business.
Details about your business
Have the key details about your business ready to go. Include:
- What you’re selling, providing or producing.
- Where you’ll be located.
- Details about your competition.
- What’s happening in your market and industry.
- Details of lease terms.
It’s important to show that your business can generate enough cash to meet your outgoings (with your new loan added in) and provide an income. For example:
- Monthly profit and loss projections.
- Monthly cash flow forecasts.
You’re also best to describe why you think your sales are achievable, how you’ll achieve your projected profit margins, and any key expense items. Make sure you allow for the extra costs in achieving higher sales.