We've spent some time on this blog talking about generating financing for your business. But what do the decision-makers - - the banks, the credit lenders, the Small Business Administration, and other financial organizations -- look for when deciding whether or not to lend you their money?

Actually, it's not all that complicated. The information below will give you a heads up on what more traditional financial institutions will ask for when you apply for lines of credit or loans through the Small Business Administration (SBA.). The SBA, by the way, has an excellent checklist of documents needed for its loan process.

For both types of common loans (short-term and long-term), your business (or business-to-be) requires the following documentation before your loan request can be evaluated:

• A business profile. This is a written statement.  A document describing the type of business you own, and includes details, such as annual sales, number of employees, length of time in business and specifics of ownership.
• Loan request. This is a description of how you want the loan funds to be used. This statement should include purpose, amount and type of loan.
• Collateral. This gives the lender a description of the collateral you’re offering to secure the loan, including equity in the business, borrowed funds and available cash.
• Business financial statements. These are complete financial statements for the past three years as well as well as current interim financial statements.
• Personal financial statements. These are statements of all the owners, partners, officers and stockholders who owning 20 percent or more of the business.
  

Be sure that your financial statements are carefully prepared and up-to-date! The strength and accuracy of your financial statements will be the primary basis for the lending decision to go in your favor, so be sure that yours are carefully prepared and up-to-date. 

The most important documents in your financial statements are:

• Balance sheets from the last three fiscal year-ends.
• Income statements revealing your business profits or losses for the last three years.
• Cash flow projections indicating how much cash you expect to generate to repay the loan.
• Accounts receivable and “payable aging,” breaking your receivables and payables in to 30-, 60-, 90- and past 90-day old categories.
• Your personal financial statements from you along with statements from your business partners listing all personal assets, liabilities and monthly payments, as well as your personal tax returns for the past three years.
  

What to include a loan proposal…in a nutshell:

• Business name and address
• Names of principals and their social security numbers
• Purpose of the loan---be as specific as possible about what it will be used for? (salaries, equipment, etc.)
• Amount of money you need: EXACTLY
  

Business description:

What kinds of business?

History?

How many employees and current business assets do you have?

Management:

Offer a short description on each principal…including background and education, experience, skills and accomplishments.
Market:  Demonstrate knowledge over your product(s) and where it fits in the market(s). Competition and role in the overall marketplace
Sketch customer profile and how you business can fulfill customer needs.

How banks will review your loan proposal (in a nutshell)?

1. First and foremost, they want to see PROOF they will be repaid
2. That means they'll investigate your credit
3. Outside sources of funding (at least 25-50%) will strengthen your case
4. Sufficient experience to pursue business enterprise
5. Suitable cash flow for business to run
   

The key? Be prepared and have both your documents and financial story in order. If so, the road to solid financing is wide open.

Unless you're independently wealthy, you'll probably face the most common (though hardly unsolvable) problem when you start up your business. That is securing a reliable cash flow and obtaining financing sources. Big questions and daunting procedures, such as "how do I apply for a loan?" or "what is a credit line?" or "what if I'm a victim of discrimination?" could discourage and frustrate the most enthusiastic of new business owners. But, they don't have to hold you back.

If you do your homework and are prepared for the inevitable difficulties of this complicated process, you'll be well ahead of your competitors. That's a good thing - - after all, there is only so much money to go around.

Where should you start?

A good rule of thumb here is to discount nothing (and no-one) in the preliminary brainstorming stages. Financing can come from a vast number of people and institutions, including your family and friends. However, in all cases, you should strive to make the process wholly professional and for obvious reasons always respect the money (and time) of others.

Helpful hint: It's best to pursue parallel funding from several sources, including your own savings, family and friends, potential investors and bank loans. So it makes sense to hire an attorney to help you with payback terms, or you can draft your own terms of agreement to re-pay any loans.   One thing is certain: Disputes over money can make or break a relationship!  So you'll also want to look as professional (re: prepared!) as possible, and an attorney can help you there.

Here are some more specific suggestions about where to start looking for the money:

• Personal Savings: Use your own savings to finance many up front costs. Saving up over the years can give you a head start and if available, is obviously the best option when looking for funding sources.
• Family members and friends. Here's a group of your most staunch supporters and loyal allies. These familiar individuals are far more likely to loan you money without interest and/or at a far lower rate than a bank. (You'd be surprised how many companies started with help from personal friends or family.) However, there also the same people who might take you a little less seriously, maybe they even knew you when you were in grade school. That's all the more reason to present them with a re-payment plan that's satisfactory along with a neatly organized business plan. You don't want to lose their friendship and loyalty.   It's best to approach your family and friends with a list of funding options. Don't play with anyone's money, including loans from your mother or father.  
• Angel investors or Venture capital firms: Be forewarned. These investors are usually more inclined toward large experienced businesses, but that doesn't mean they won't sometimes take a calculated risk on a Really Good Idea and an impressive new business owner.
• Finance Companies: According to the Small Business Association, finance companies are consistent backers of new small-sized companies.  Benefits of using a finance company include their flexibility and longer-lease times. They can also provide you with funding more quickly. On the other hand, finance companies charge much higher rates.
• Banks and credit unions: This route requires you to write an effective loan proposal. It's helpful to remember exactly what banks are looking for, so you don't waste time and you know what to emphasize in your application for loans.
  

In the next small business blog, we'll go into more detail on what banks and lenders look for when deciding to fund a new business venture -- or not.