Business Financing and Planning
Most businesses will need financing at some point. Business owners have two general options for obtaining financing - equity or debt. Equity financing involves investing either your own money or money from other investors in return for owning a portion of the business. Debt financing involves borrowing money from some organization willing to lend it. Businesses are commonly financed using both. Very few lenders will finance 100 percent of any deal. On the other hand most people--even if they could finance the entire project from personal funds--prefer to borrow money. The business person, for example, would finance the business by investing personal savings and borrow money to complete the amount needed for the deal. If the company is incorporated, the savings invested (equity) may be issued in the form of stock. Most every organization or individual who has money to invest in your business will require some form of business plan. The business plan should tell the lender or investor all they need to know for them to make the financing decision.
What Lenders Need
Lenders are going to review your personal credit history. If your credit report shows bad or slow credit, borrowing money will be more difficult. Lenders will also want you to supply all or some of the following information. Ideally, these items would be included in the financial section of your prepared business plan.
- An explanation of how much you want to borrow, how you will use the money, the period of time for which you want the loan, and how you want the repayment to occur.
- Personal Financial Statement that shows what you own, owe and earn (assets, liabilities, and annual income).
- Historical financial statements or income tax returns for the last three to five years (or longer if the data exists). This is required only if you are purchasing an existing business.
- Projected Income Statement for the business for three to five years.
- Projected Balance Sheet for the business for three to five years.
- Projected Cash Flow Statement (broken down monthly for the first year), for three to five years.
- A Debt-Service Coverage Analysis that shows how the income from the business will cover the loan payments.
The U.S. Small Business Administration has a number of programs that can help lenders make loans that may fall shy of the institution's lending criteria. These loans can help lenders make very small (microloans) and very large loans. The SBA loan programs can be beneficial to both the borrower and the lender. The SBA loan programs work basically as follows:
- You request an SBA guaranteed loan through your bank.
- You, with assistance of the loan officer, complete an SBA loan application packet.
- The completed application is forwarded to SBA by your loan officer.
- If SBA approves the application, the SBA will guarantee a portion of the loan and the bank gives you the loan.
- Then you repay the bank.
SBA requires the same financial information that any lender would require. The most common SBA loans are the 7(a) Guaranteed loans, MicroLoans, and SBA 504 loans. MicroLoans are for smaller project amounts; whereas, 7(a) and 504 loan programs are for larger projects. For the most up to date information about these and other SBA loan programs, visit the SBA loan program website at https://www.sba.gov/loans-grants/see-what-sba-offers/sba-loan-programs.