In the first part of this article you discovered two foundational and important pre business start-up loan application skills. These were:
- Being professional
Learn all you can about running a business by taking courses and talking to business owners from varying sizes of business. - Do your research
Learn as much as you can as this helps formulate, your ideas and grow your knowledge about your industry and the market it serves. This knowledge or data will become the backbone of your loan application and hopefully provide the bank manager with confidence that you have good experience in this industry sector.
Now that you have gathered a great deal of information, you need to spend some time working the numbers so you can tell your story.
What Are The Key Numbers In Your Business?
These are the costs of running the business including:
- the price you sell goods or services,
- the cost of buying the products
- other running costs you will incur to achieve this.
This data needs to be written in a format the bank will understand which is called a profit and loss forecast. Yes, you need to forecast how much you will sell each month for the next year. You will also need to forecast what your costs will be for the same period and show how your money will will flow, in and out – known as a cashflow forecast.
Whilst it sounds complicated, businesses of all sizes complete profit and loss / cashflow forecasts every year. If you need additional help with this, please check out my article: ‘How to write a profit and loss forecast for a start-up business‘.
Tell Your Story…
You’ve completed your forecasts and on paper, you can now see whether you have a viable business. A business is deemed viable if it demonstrates that it can make a profit after paying all expenses including paying you as the owner. It should also be able to demonstrate that it has control of cash so that there are no surprises and problems that haven’t been thought of and included within the figures. The last thing you want to have to do, is to return to the bank a few months after commencing trading asking for more financial assistance because you got your numbers wrong. However, if it is because you have been too successful, then you stand a good chance of receiving additional help.
Your numbers tell the story of how you expect your business to work. You do this in the form of a business plan. I have written about this subject before but let’s run through it again.
The opening part of the plan is the executive summary:
This explains that you have recently established your business with the view to serving a certain market. You tell the bank that you will require a specific level of funding and provide the reason why you need the funding. It’s a short but concise opening and meant to be this way.
The next part of the plan is “background”:
This is the story of your experience, what you have done in the past, jobs, courses etc. This also explains how you decided upon this particular business. You can include a sub-heading to provide information from your research about the industry nationally, regionally and/or locally. You can also say why you intend to establish your business in a specific location (but don’t sign papers on this property until you have the finance in place).
Your story should be making sense to a trained finance professional. There should be sound reasons why you believe you have the qualifications and qualities required to make this business work. Include a SWOT analysis which is “strengths, weaknesses, opportunities and threats”. Be realistic – your bank manager will ask questions on your analysis.
Your next major heading is “finance”:
This is where you elaborate on the funding you require and how you require it. This could be through a range of products the bank offers or a combination of bank and non-bank financial assistance, including spending some of your own money. The bank will not fund the entire business and will be asking for a percentage contribution from yourself. In other words, you must demonstrate that you are willing to take a risk too.
Within the finance section you should also be able to explain your forecasts. How were your sales figures calculated? Give sound reasons why these figures are realistic or even pessimistic. Do not be over optimistic. The bank manager has seen so many forecasts that show rising sales and no plan to achieve these sales figures.
Explain your cost structure and ensure you have covered everything including the possible cost of borrowing the money. Again, your research in identifying costs so that they are realistic is important. You cannot guess and get away with it.
Have a section on sales and marketing too:
You need to demonstrate that you understand how to create a customer because without this, a sale is not made. How much are you spending on marketing and where is this being spent. What returns are you expecting? What timescales are required from the commencement of marketing to a prospect becoming a customer?
To wrap up your business plan, have a second summary:
Run through the reasons which justify why the bank should be assisting you and providing the finance you require.
Now that you have done your homework and written your plan, you are ready to send your bank manager the plan and arrange a meeting to discuss it in detail. This meeting can be daunting to start-up business owners.
In the third part of this series of articles, you’ll discover how to prepare and present your application to your bank manager to help you improve your chances of securing the funding.
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