As a small business, it is imperative that you understand your financial needs. Knowing your projected annual expenses, having a business plan in place, and assessing your need for funding sets the foundation for a profitable and successful business venture. To better assess your need for a business loan, you’ll need to take a good look at a number of factors.
What documentation do you need to assess your financial needs?
(Business plan with financial projections, P&L statements, balance sheet, sales forecasts, cash flow statement)
All of the above! First, you must have a business plan that defines when you will be putting revenue in the bank. And it must be based on something concrete. No wishful thinking. Make certain you do the research to learn about your industry and what it takes to monetize. This is the number one problem I see with startups. Often they believe with a good idea one can start a business, and in some magical way, money shows up. Monetizing any new business is very difficult.
Once that research is done, it’s important to build out your projected annual expenses, a three-year projected Profit and Loss Statement, and Balance Sheet. You may need help to do this. Hire that help only after you’ve done your research or you will be wasting your money. Most accountants won’t do the research; they just build the numbers based on what you provide.
The Accountant, CPA, or other business financial advisor should be able to help you determine how much capital you need to raise and how long it will last, once the three-year projections are prepared.
Resources to get started creating the necessary documentation
You can always find software online to handle these types of projections and statements. That said, Excel is free and it works well when you are building out your revenue and expenses. That’s the meat of your research. Just google it and you will find free Excel templates.
What is your ability to repay the loan?
Traditional bank loan agreements typically identify the debt service coverage ratio (DSCR) your business will have to meet to remain in good standing. It’s defined as a ratio of income to debt service (principal and interest) and is normally set forth in the range of 1.20-to-1.25 by most lending institutions.
We offer a free tool to calculate your business’ DSCR on our website. It helps business owners understand what they should expect. It’s a very popular tool because it tells you exactly where to find your figures to compute your business’ DSCR.
Holly also founded ExitPromise.com and to date has answered more than 2,000 questions asked by business owners about starting, growing and selling a business.