Give Yourself the Money Hunting Edge
Adapted from content excerpted from the American Express® OPEN Small Business Network
Whether you're looking for a small, short-term loan or actively pitching venture capitalists, strong preparation and planning can improve your chances of finding financing. You need to put your small business in the best possible financial light to make a good impression on prospective sources. Take time up front to get yourself ready for this process.
Here are 10 things you can do before you seek financing to help your chances of getting that loan or investment you need:
- Get your business plan in shape
- Put your paperwork in order
- Be prepared to show how you'll use the money
- Examine your ratios
- Check your credit
- Register with Dun & Bradstreet
- Make your applications impeccable
- Be patient
Get your business plan in shape
Review the latest version of your business plan to make sure it tells the story of your company accurately and efficiently. Is it easy for a potential investor to get a handle of your company by skimming the plan? How effectively have you demonstrated that you understand how to market your great product or service and turn a buck doing so? How strong is your executive summary? Do your financials show when and how you will obtain long-term profitability? How honest have you been in your assessments of the market and your competition? Do you have third-party corroboration to back up the key assumptions you're making in your plan?
Put your paperwork in order
A standard loan application requires specific documents and numbers. You should take some time before going through the loan process to get this information in order. It's always a good idea to schedule a meeting with your CPA or other financial advisor to do this. Among the documents you'll need are:
- Accountant-prepared business financial statements (P&L, balance sheet) for the past three fiscal years
- Business federal tax returns for the past three years
- Interim financial statements (if available)
- Most recent federal tax returns for each principal owner
- Personal financial statements for each principal owner
- Organizational papers, such as articles of incorporation, dba papers, business licenses, etc.
- Lists of business and personal assets that could be used as collateral
- Names and contact information for at least three credit references
Be prepared to show how you'll use the money
In addition to the previously discussed documents, you may want to include a pro forma that includes projected financial statements for the next 3-5 years. In your pro forma, give a clear description of how you'll use the proceeds and how you intend to pay the money back. Be specific. Show how you'll use the money to open up new markets, introduce new products, or other definite business use that will positively impact your bottom line. Vague terms like "need working capital" don't work because they don't give lenders and investors the confidence that their money will be well spent. Try to tailor these presentations to the needs of the funding source. If you're looking for debt financing, you'll want to emphasize your ability to repay the loan. On the other hand, equity investors will want to see the potential for strong rate of return.
Examine your ratios
You might be tempted to provide optimistic projections in your pro forma financial statements, but that could be a big mistake. Bankers want to see business projections that are in line with industry averages, which they get from the operating ratios published in the Annual Statement Studies from Robert Morris Associates. Those that differ markedly raise an automatic red flag, and immediately put your loan application in jeopardy.
Check your credit
Many banks now use "credit scoring" to determine whether you qualify for a loan or not. Commonly used for consumer loans, credit scoring uses factors such as credit history to determine whether or not you're a good risk. Even if your bank doesn't rely solely on this method, it will no doubt look at your past payment records to determine your future credit worthiness. There's also a good chance that you will be asked to guarantee any loan personally, so your personal credit history is also important. Be sure to contact the major credit bureaus -- TRW/Experian, CBI Equifax, and Trans Union -- to get a copy of your credit reports to ensure their accuracy and correct any possible mistakes before you start looking for a loan.
You don't have to be incorporated to find financing, but it can help. Even though other structures are equally appropriate for many businesses, there is a certain cachet to corporate status for lenders and investors. They will likely feel more confident about your business. Incorporation will also make it easier for outside investors to acquire equity in your business in return for their money.
Register with Dun & Bradstreet
If your business does not yet have a DUNS number, get one. A DUNS number identifies your individual business, and makes it easier for potential investors to look up information about your company (in the form on Dun & Bradstreet credit or information reports). A DUNS number also connotes a level of professionalism and seriousness to lenders and investors.
Many small business owners find it useful to conduct a mock interview before speaking with financing sources. This lets them prepare strong, effective answers for any possible questions that might come their way. Remember, you only have one shot at a potential investor, so you need to get it right the first time. Don't make these practice sessions casual. Get help from your CPA, a peer who has recently sought financing, or a banker acquaintance. Make sure they ask questions as tough as those you'll get from a bank.
Make your applications impeccable
Your financials are probably the most important criteria for helping you get financing, but neatness counts too. Don't forget about the little things that will help you impress money sources and reinforce your image of professionalism. Make forms neat and easy to read, since sloppy reports will do nothing but work against you. Dress in appropriate, conservative business attire for meetings. Do everything possible to demonstrate trustworthiness and show that you're highly capable.
Finding financing, no matter what stage your business is at, is a time consuming and exhausting process. Many small business owners vastly underestimate the time it will take them to find the money they need, and it's not uncommon for businesses to run out of cash during the process. Be sure you factor in time for all the tasks you'll need execute -- from refining your business plan to weeding through lists of banks, lending institutions, or outside investors.
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