Small Business Foundations Applying for Financing

Applying for a Loan Consider this! A successful business can be measured by the motivation, desire, talent and time commitment of owners and employees! Successfully obtaining bank financing is measured by how well you plan and execute the interview with your Banker! Motivation = level of enjoyment of producing a great product or level of service Desire = possessing a need to be please and impress customer with your product or service Talent = Giving the best of yourself in the job your perform Time = However long it takes!

Applying for a Loan What a potential borrower should know: There are two types of financing: equity and debt financing. You must consider your company's debt-to-equity ratio, which is the relation between dollars you‘re borrowing and dollars you‘re investing in your business. The more money you invest as an owner, the easier it is to attract financing. If your company has a high proportion of debt to equity, experts advise that you should increase your ownership capital (equity investment) for additional funds. This way, you won't be over-leveraged to the point of jeopardizing your company's survival. Additional equity often comes from non-professional investors such as friends, relatives, employees, customers, or industry colleagues.

Applying for a Loan What a potential borrower should know: (cont’d) Whether you're starting a business or expanding one, sufficient ready capital is essential. Avoid common mistakes like securing the wrong type of financing, miscalculating the amount required, or underestimating the cost of borrowing money

What a potential borrower should do: Applying for a Loan What a potential borrower should do: Choose a Banker who has some knowledge of your industry. Anticipate in-depth questions about your company’s operation. Prepare a brief presentation about ownership and/or management; recent developments in your business; future plans for expansion; as well as the impact any internal or external events (i.e. the economy, technology, etc.) have had or will have on your business. (i.e. increase/decrease in sales, expenses, profits) Be honest and forth right in your conversation. Point out the strengths and weaknesses of your company.

What a potential borrower should do: (cont’d) Applying for a Loan What a potential borrower should do: (cont’d) Discuss financing options/alternatives that will accurately meet the current need(s) of your business. Make sure the Banker in front of you can handle your loan request ($ amount and loan type). Be clear about the use of the loan funds, and, if applicable, have items such as a bill of sale, a purchase and sale, accounts receivable aging, inventory and/or machinery & equipment listings at hand. Let the Banker know what terms you are looking for and if they fit in the Bank’s lending guidelines. (Note: If purchasing equipment, inventory, or real estate, 100% financing is not an option. Borrowers should have 20% -30% available as their down payment or capital injection if request is for a start-up) Explain how government programs can help Discuss levels of lending I.e. $5,000 and above Or is small business considered anything over $100,000

What a potential borrower should do: (cont’d) Applying for a Loan What a potential borrower should do: (cont’d) Discuss your current cash flow situation, to support both the request and the terms you’re looking for. Have historical and interim financial information available when you meet with a potential Banker. (note: provide both business and personal financial information) If applicable, provide projections for future months and explain how they match up against current and/or historical financials. Ask about the application process (i.e. approximate time frame from submission→ decision→ closing). Ask about any government sponsored loan programs that the bank participates in. (i.e. SBA)

Getting ready to submit the application: Applying for a Loan Getting ready to submit the application: Before the application leaves your desk, review it with the Banker. You and the Banker should agree that all financial information, agings, and listings required are included in the package. REMEMBER: A timely loan decision can only be reached if the Banker submits a ‘complete’ application package!

What to do if your business is a start-up: (less than 2 yrs old) Applying for a Loan What to do if your business is a start-up: (less than 2 yrs old) Have a solid business plan with projections (Note: it is advisable for start-up entities to work with agencies such a SCORE, Community Development Centers (CDC’s), Center for Women in Enterprise, etc,. to get assistance in developing a business plan). Provide interim financial statements if your business has been in operation for 45 days or more. Provide 2 years personal tax returns along with a personal financial statement. (note: use the bank’s personal financial statement form or one prepared by your accountant/CPA) Replace “the business” with “your business.” Change sub-bullet 2, 3 & 4 to read: Provide interim financial statements if your business has been in operation for 45 days or more. Provide 2 years of Personal Tax Returns along with a Personal Financial Statement which can be prepared by your CPA, or, use the institution’s form.

Applying for a Loan When reviewing a loan application, banks still look at: The “5 C’s of Credit” Character Collateral Capacity Conditions Capital

Understanding the “5 C’s of Credit”: Character Applying for a Loan Understanding the “5 C’s of Credit”: Character Measures the integrity of the borrower Analyzes past credit payment history Based largely on the business and personal credit reports of the company and owner/guarantors Analyzes the borrower’s credit with trade suppliers other references The character analysis aims to predict the likelihood of timely loan repayment.

Understanding the “5 C’s of Credit”: (cont’d) Collateral Applying for a Loan Understanding the “5 C’s of Credit”: (cont’d) Collateral Collateral is what borrower “pledges” to secure financing Business and personal assets are evaluated to determine sufficient coverage based on loan size Collateral is considered a secondary source of repayment in the event the business cash flow (net profit) fails to do so. Types of collateral includes: equipment, accounts receivable, real estate, vehicles, and inventory.

Understanding the “5 C’s of Credit”: (cont’d) Capacity Applying for a Loan Understanding the “5 C’s of Credit”: (cont’d) Capacity Capacity determines whether or not the customer has the ability to repay a new loan and/or current debt obligations by testing the business’s liquidity and ‘cash flow’ Capacity is considered the most important factor in a business credit decision Capacity involves the analysis of historical financial trends and ratios.

Understanding the “5 C’s of Credit”: (cont’d) Conditions Applying for a Loan Understanding the “5 C’s of Credit”: (cont’d) Conditions Assesses the borrower’s industry as well as the overall economic conditions A brief historical evaluation of the industry the borrower is in is performed A evaluation of the borrower’s ability and preparedness is done to see if the company and its management is able to cope with changes in a changing economic environment.

Understanding the “5 C’s of Credit”: (cont’d) Capital Applying for a Loan Understanding the “5 C’s of Credit”: (cont’d) Capital Assesses the amount of money the owner(s) of the has invested in the business. An analysis of available sources of cash and other personal assets outside of the business is completed The relationship between debt and equity in the business is measured.

Applying for a Loan Remember Your Banker is a valuable resource Borrowers can and should consult with their Banker. Your Banker can walk you through the application process. Keep in Touch When you develop a relationship with your Bank and Banker, it keeps them well informed about the growth and well being of your business. When or if the company needs another loan, the process is smoother because of the relationship.

QUESTIONS Call –TD Bank