Taking Your Ideas To A Bank - by Jim Richardson, CEO, HEDC

In the last article "So You Want To Start a Business", I wrote about developing your idea to start a business and the important step of convincing yourself and others that it can be successful. You must now take your idea to the next stage and that is to obtain the financing necessary to start your business. Many ideas are dropped and do not go any further because of that first meeting with a bank, credit union, aboriginal capital corporation or other financial institution. Preparing for that initial meeting is very important…and no, that is not why you get the H1N1 vaccination! Bankers can make you feel uncomfortable and discouraged but you can avoid this by really preparing for that initial meeting where you apply for a loan.

Getting a loan does not have to be a bad dream! Just remember the information and structure that convinced you that the idea was viable. Become very familiar with the business plan that you prepared or had someone prepare for you and know all there is to know about your business. The banker will get nervous if you go to a meeting and the person who developed the business plan does all the talking and seems to know more than you do about your business. Banks basically want to know the amount of money you need, what you are going to do with it and how you are going to pay it back. They will also want to know whether you have assets to cover the amount of money you need and they refer to this as security. This has become difficult for on reserve residents because lending insti-tutions cannot lay claim to your house or your land. For on reserve lending they place importance on the character of the individual and the soundness of the business as reflected in your business plan.

Your business plan should contain a good financial plan with a month to month outline for the first year of operation. Remember, you don’t have to be a financial genius to prepare the plan and if someone prepares it for you….make sure you are knowledgeable on all aspects of the financial plan before you go to see a banker! The financial plan should contain a projected balance sheet, income statement and cash flow statement. The plan should give you a picture of the money you expect to receive, what you plan to spend and when. The financial plan will tell you how much money you need to borrow and take from your savings to finance the business. You will need initial capital to cover your start-up costs which will include legal fees, deposits with utility companies, licenses and permits, machinery and fixtures, rental for premises, franchise fees (if required), opening promotion, etc.

You will also need working capital to operate your business.  You need to purchase raw materials or merchandise for resale, purchase supplies, pay employees, etc. In short, you need working capital to keep on operating until you begin to make a profit. You will also need reserve capital for unexpected bills and to allow you to eat three meals a day, pay your rent or mortgage, buy clothing, etc. Banks will only lend to busi-nesses which can realistically meet cash needs to pay all debts as they are due, maintain working capital at a viable level, replace worn out facilities and provide for all the personal living expenses of the owner.

Banks and other lending institutions refer to what they call the “C’s” of credit. One of the more important C’s is Character. This basically refers to how a person has handled past debt obligations. The bank is able to obtain your credit history and thus determine your honesty and reliability to pay debts as they are due.

If you previously declared bankruptcy, it will be difficult to get a loan. The same applies if you have a bad credit rating because you did not pay your past bills. In these cases it will be important to show that you have improved in your ability to handle debt over the most recent couple of years. Another important “C” is Capacity and this refers to how much debt you can comfortably take on. To determine this, the income derived from the business and elsewhere is analyzed along with legal obligations that may interfere with repayment. The whole point here is to ensure that you have the ability to make monthly interest and principal payments on the loan as well as pay all the costs associated with operating the business. Capital is another important “C” and this refers to the current available assets of the borrower such as savings and investments or other assets that could be used to repay the debt in the event income from the business is not available. You will need to put some of your own money into the business. This is called equity and a lending institution will want to see some of your own investment in the business. They generally refer to this as a debt to equity ratio. For example, some lending institutions may want to see a debt to equity ratio of 4 to 1 for loans under $100,000. What this means is that you should come up with $25,000 of your own money for the project if you are asking for a loan of $100,000. Having an equity investment gives the bank a degree of comfort in knowing that you have some of your own money tied up in the project.

The information that we have discussed above will definitely prepare you for your meeting with a bank for a loan but…. even then there is no guarantee that they will grant a loan. When banks or other potential lenders say “no”, don’t panic! Ask questions, take notes and listen carefully because this is your chance to gather information which could help with approval next time or better prepare you to approach another lender. If you can identify weaknesses in your proposal, you can revise your business plan or the financing structure and succeed next time.

The idea is not to change the banker’s mind but to prepare you for the next time you ask a bank or someone else for financing. You may have to arrange for another meeting to deal with all of your questions which would include what factors pertaining to the business were not acceptable. Perhaps it is the type of business, the location, the products, employees, capitalization, management or other aspects of the business plan that made them uncomfortable. Was the negative reply due to the lender? Often lenders steer away from particular loans because of a previous bad experience in the industry or the type of loan. For example, some banks may not want to lend to restaurants because they have seen too many of their loans to restaurants fail in the last year. This has nothing to do with the quality of the loan application. In that case, you would be encouraged to approach another lending institution. You will want to ask what weaknesses need to be addressed and strengthened for the next loan proposal. In other words, was the lender’s rejection intended to be permanent, or can conditions or specific benchmarks change the response. Finally you will want to ask if the lender can make recommendations about where else you can apply for your loan. Based on my experience, many entrepreneurs who are now successful were turned down several times for a loan. They did not drop their idea because of it. They stuck with their dream and persevered. You to can do the same. Follow your dream!