Debt Financing: A Lesson From the High Dive
in Strategy & Trends | by David Capece
Preparing for the Perfect Score
By Christopher Yuskiw, Guest Contributor
Before your business takes the dive into debt financing, make sure you have prepared for the associated risks with borrowing, so when you do take the leap, you don’t belly flop. Preparation is vital. How can you get a perfect 10 so you can finance your business? Let’s take a step back and look at how banks evaluate risk and how they view businesses.
Depending on what stage your business is in will have a huge impact on the way a bank looks at your business:
- Stage 1: Are you a start up (have you been in business two years or less)?
- Stage 2: Are you an established growing business (have you been in business for more than two years and still growing; i.e. are your sales still expanding, not yet stabilized)?
- Stage 3: Or, are you a mature business with a stable sales cycle (have your sales reached a plateau and are no longer growing rapidly)?
Knowing where your business is in its growth cycle will better help you prepare for the bank lending process.
Debt Financing for a Start-up (Stage 1)
A start-up business is going to have the most difficult time obtaining bank funding. Think about it; ideas are worthless without execution. If we could all capitalize on our ideas, then everyone would be in business for themselves.
Banks approach each deal based on the amount of risk they are undertaking and start-ups are as risky as they come. This is why it is vital for a business to be completely prepared for the bank underwriting process. You need to be prepared to answer any and every question that a bank might ask, be your best advocate, and able to sell your business as a good risk.
So, what can you expect? While every deal that a bank looks at is unique and presents its own risks and challenges, there are some common things that most banks will look for.
Be prepared to provide:
- A business plan that gives a thorough explanation of your business and its strategy
- A project cost worksheet (what are you going to use the money for?)
- Management resumes (how much experience do you have in this field?)
- Two years of personal tax returns and all schedules for every owner of the business (typically defined as a person who owns 20% or more of the business)
- Personal financial statements for each owner
- Two or three years of projections showing the business’s expected cash flow (broken down monthly)
- A business debt schedule (does the business have any other debt? I.E. personal notes, other start up financing, etc)
- Collateral (what do you have in terms of assets that the bank can take as collateral?)
- It should also be pointed out that most banks have minimum credit score requirements for all parties guaranteeing debt (a 700 or greater credit score for start ups and 650 or greater for established businesses)
Though useful upfront information will get you into the front door, don’t be surprised if a bank requests additional information. Start at a bank where you have an existing relationship and have a candid conversation with a loan officer. Ask them what their credit, collateral, and equity requirements are for their business loans; be sure to explain your business in detail, as this can have a bearing on the requirements.
Banks look at things from many different angles to evaluate your risk. You may be working with one bank employee, but there are probably several parties involved in underwriting your deal; each person will approach your deal from a different perspective.
Start-up Resource Guide
Though debt financing is challenging, we hope you haven’t abandoned your business. While approaching a bank for start-up financing might seem like an impossible, daunting process, it doesn’t have to be. There is free help out there. Two great resources available to everyone are the SBDC and SCORE. Both are government sponsored programs funded by tax payer dollars.
The SBDC (Small Business Development Center) is a government-funded program that seeks to provide assistance to current and prospective small business owners.
Some Useful Services for Startups:
- Viewing and interpreting your credit
- Writing a business plan
- Making projections
- Developing a management plan
- And many other useful, free services
If they can’t help you, more likely than not, they will know someone who can.
SCORE (Service Corps of Retired Executives) is a nonprofit association that exists for the purpose of educating small businesses owners and promoting the growth of US based small businesses. SCORE offers services similar to the SBDC.
While it can be difficult for some to obtain bank financing, it is not impossible; you also do not have to go at it alone. Whether you decide to approach the task alone, utilize a free service, or pay a consultant or a broker to help you, you need to understand that preparation is vital.
If financing your business were like high diving, learn from your 4 and 5 scores. Find out why you didn’t meet the bank’s expectations and learn from it, so the next time you take that dive you can get that perfect 10.
Bottom line: don’t give up… you’ve decided that this is what you want, you’ve trained to get that 10, so be prepared to work for it.
If you are an established business seeking bank financing, please see the second installment of this article.
If you are looking for business loans, consider your options as well as business cash advances can be more flexible.