Buddy, can you spare 10 grand? Or $20,000. Or $2 million?
Of course, the answer to that kind of question is going to be a bummer. Getting financial backing for your startup takes a lot more than a toothy smile and a simple request.
Knowing how to lay the groundwork, prepare the documentation that’s expected of you and present yourself as the live-wire entrepreneur that angels love, is essential to approaching — and closing — the deal.
But landing outside financial help isn’t as simple as, say, loading up on credit-card debt or taking out a second mortgage on your house. There are many options, and they have their differences. All, however, rest on the utterly simple Boy Scout Motto — Be Prepared.
In many regards, getting a business loan is like finding a new job. The applicant has to look sharp, be well-informed on the company she’s interviewing with, be able to perform the job being sought, be committed to it, have a concise and easy-to-follow resume and provide professional or personal references.
When one or more of these requirements is lacking, the likelihood of getting the job or, to complete the analogy, funding for your business, is greatly diminished.
One traditional financing option is an SBA-guaranteed loan. It doesn’t lend funds directly to entrepreneurs, but the Small Business Administration helps lessen lender risk. You’ll need to start and build a good relationship with your loan officer — whether at a bank, credit union or nonprofit financial intermediary — to access such sources as the 7(a) Loan Program. As a small-business owner, you can get as much as $750,000 from your local 7(a) lender, backed by a partial guarantee from the SBA.
To begin preparing for your loan application, whatever the source, know the 5 C’s of Credit:
- Capacity: The ability to repay is the most critical of the five factors; the lender will want to know exactly how you intend to do it.
- Capital: The money you personally have invested in the business is an indication of how much you’ll lose if things go bad.
- Collateral: The lender wants additional forms of security from you to back up repayment.
- Conditions: Is the loan for new equipment? Working capital? Inventory? The specific purpose plays into the lender’s consideration, as does the local economic climate and conditions both within your industry and in others that could affect your business.
- Character: Don’t underestimate the impact of your personal impression on the potential lender or investor.
As an entrepreneur, your goal is to persuade investors to believe in you. Just as with a job interview, you would always come prepared with resume in hand. Applying for a loan or funding from an investor is no different.
That business “resume” should include the following.
- An executive summary.
- Your business plan.
- Your financial forecasts.
- Your tax returns — business and personal.
- Your personal financial statements.
- Resumes for all owners.
- Copies of all legal documents related to your startup.
Those startups that don’t or can’t meet the 5 C’s of Credit may want to look into such alternative sources as commercial finance firms, which work with companies that are already making money but not yet “bankable.” Their primary focus is on your character and collateral.
Their most common “worst practices” of those making a pitch:
- A lack of solid research on the need for their product or service.
- Inexperience with their product or service.
- A wordy, unwieldy business plan.
- An overall lack of professionalism, including personal appearance.
- An unwillingness to assume financial risk – putting your own money where your mouth is.
A business borrower has to show that he’s invested his own money, and perhaps that of family and friends, to get his product or service to the point where a business loan is needed for the next stage or development or sale. If the borrower won’t assume the risk, a lender won’t either.
Preparation is the key. Come to the meeting with a thorough summary of the business, including accounts receivable aging, accounts payable aging, equipment and real estate appraisals, personal financial statements and both past and predicted company financial statements.
You must have a game plan that starts with the executive summary, which turns into a PowerPoint and closes with financial statements and forecasts. So bring your best business ‘resume’ and give yourself a chance at success.
Mike Semanco is a contributing writer for StartupNation, and the President & COO of Hennessy Capital LLC.