This information, excerpted from the book, "Understanding Small Business", to be published in the fall 2005, is used by SCORE in business counseling.
For details contact your own banker.
At some point every business must borrow money.
Prepare yourself before you meet with prospective lenders and understand what lenders are looking for.
The size of the investment.
One major question is "How much"? Bankers consider some industries riskier than others and require more equity or collateral.
The borrowers credit strength, quality of the business plan and a demonstrated ability to service debt from cash are important.
Expect to provide equity of 25% to 33% Collateral on a liquidated basis often more than the face amount of the loan may be required.
Borrowers may need to pledge personal assets, and provide personal guarantees.
Certain assets such as homesteads, and retirement accounts may not be pledged.
Owner's Credit history and credit score and explanations of any negative items are necessary.
Ability to Service Debt must be demonstrated by cash flow.
Allowances must be made for adjustable rate loans.
Owner's draw must be recognized and be consistent with a personal budget.
Sufficient Capital and Owner's equity investments demonstrated by accurate and complete cash flow projections.
The business must service all debt and expenditures including the owner's draw, plus cash equal to offset the cumulative cash shortfalls during start-up.
Experience and Management Skills demonstrated by an updated factual resume and description of related experience help the lender make a decision.
General requirements for all small businesses.
A business plan is necessary: Define the business idea clearly in the executive summary of the plan.
If no business plan is available, explain why not.
Make the amount of the loan clear.
Include a breakdown of how the funds will be spent and how cash flow will service the debt.
Describe the proposed legal structure of the business.
Include copies of all leases and other relevant documents.
Documents required by all owners, anyone with 20% +interest and guarantors.
Personal documents, including credit scores, explanations of any negative items and a personal budget.
Personal financial statement and IRS records for the past three years.
Equity funds to be invested must be verifiable.
List all collateral to be pledged.
All business assets will be pledged plus a willingness to pledge personal assets.
Explain the premises (facts) and assumptions (informed judgements) used in the projections.
Estimates of cash flow projections, profit and loss statements and balance sheets by month for the first 12 months and annually thereafter.
Estimates of costs, including build out, contractor names, inventory furniture and fixtures, start-up costs, working capital and cash to offset early cash shortfalls.
Franchise proposals include the franchise offering circular and agreement.
Insure the franchise fee and continuing royalties are in the cash flow projections.
Current resumes including education and related experience of participants.
Complete application forms.
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Additional requirements for purchasing an existing business or a franchise business.
Provide a copy of the purchase agreement and the following: Stock purchases, explain the valuation method used.
Include a certified appraisal.
Detailed list of all assets and liabilities as shown on the balance sheet, a schedule and copies of notes payable or other loans with estimated balances at closing.
List all assets at market price, all inventory at cost, less obsolete or damaged equipment or inventory, at the date of closing.
Justify "Goodwill".
Additional equity may be required if questionable.
Seller provides, in writing, the reason for selling.
Seller includes a "hold harmless" statement for unknown or unreported obligations.
Income statements, balance sheets and tax returns of the seller for the past three years.
If stock is purchased, seller must reconcile capital/retained earnings on financial statements and tax returns.
For a franchise purchase, include the original franchise agreement, the remaining term, with options, any transfer fees as well as the FTC disclosure agreement.
Include all leases, valuations, property appraisals and equipment, signs and other assets owned by the selling franchiser.
Report indicating "due diligence" has been performed.
Additional requirements for borrowing for an existing business.
An updated business plan is necessary plus the following: A copy of all legal and business documents, including leases, options, deeds or mortgages.
All financial statements for of the past three years plus market and competitive analysis and the owner's plans for improving the business.
Specify loan requirements and how funds will be used.
Current financial statements, balance sheet and income statements as of the end of last month.
All notes payable, accounts payable, notes receivable, accounts receivable and due date as of the end of last month.
Include individual income tax returns for the past three years.
If a partnership or a corporation, copies of the corporate or partnership returns for the past three years.
Capital and retained earnings must be reconciled with prior statements and verified with the IRS.
Cash flow projections for prior 12 months as well as future 12 months, demonstrating cash flow is sufficient to service existing obligations plus new debt.
A completed business plan is always of value: The entrepreneur must be certain all necessary steps are completed to warrant the loan and insure the business will succeed.
The lender can be assured the funds will be used properly and that debt will be repaid on schedule.
These suggestions will provide the entrepreneur all that is necessary for dealing with lenders and bankers.
Done right your banker is a helpful partner, done wrong, you will be empty-handed.
The choice is yours.