Applying for a commercial loan to start or grow your business is very different than applying for a mortgage or a car loan. A commercial lender will expect you to be prepared by knowing:
- How much money you need to borrow
- How you will repay the loan
- What is your plan for business success
Amount of Financing Needed
Many people have undergone a pre-qualifying process before shopping for a home, so that they know how much they can borrow. This allows them to focus their home search on homes in their price range. Commercial lending, however, is much different. A lender expects you to tell them how much money you will need.
There are many questions you will need to answer to determine your start-up costs and your financing needs.
- Will you lease an office or storefront? Or will your business be home-based? If you will lease a space, you will need some money to transform the space from what it is currently to what you would like it to be. You may also be required to do some work to bring the space up to code. You will need estimates of the cost of the work to be done.
- How much inventory do you plan to buy? Generally, suppliers will require that the first order to paid in-full before the order is shipped. Also, many suppliers have minimum purchase requirements for a first order. The more suppliers you plan to purchase from, the more money you will need for your initial inventory purchases.
- What will you need to spend on furnishing and equipment, signage, office supplies, other supplies, decor, and uniforms?
- How much money do you need for deposits for your lease, utilities, and business insurance?
- Do you need money for required training and/or licenses?
- How much working capital will you need to cover three months of operating expenses?
A lender will expect a business owner to cover 20 – 25% of the start-up costs. Your loan request should be for 75 – 80% of the projected start-up costs.
Loan Repayment
Demonstrating that you will be able to repay a business loan will require an estimate of monthly revenues and an estimate of monthly operating expenses. Estimating expenses is the easy part of this equation. You should have a good idea of your lease rate, payroll costs, cost of goods sold, utilities, business insurance, and your other costs. Estimating revenues can present a significant challenge. Here is a good process to do through:
- Determine what your different revenue streams will be. If you are a restaurant, you might define your revenue streams by meals, or by food and alcohol, or by restaurant meals and catering. If you will do consulting work, you might categorize revenues by hourly jobs and contract work. Decide what classification of revenues makes the most sense for your business.
- Estimate the average revenue generated per customer. For a consulting business, the customer spend will be based on your hourly rate times the number of hours estimated per job. For a restaurant, you will want to consider how much an average customer check will be. In a retail shop, you will need to estimate how much a typical customer might spend during one shopping trip.
- Estimate the number of customers you will have over a given time period. In a retail shop or restaurant, you will estimate the number of customers per day times the number of days per month you are open. In a consulting business, you will estimate how many hours of work you will get in a week or a month.
You will subtract your expected monthly operating expenses from your expected revenues. The remainder is how much you have to put toward a loan repayment and toward paying yourself. Lenders typically want you to have at least 20% more than your expected loan payment and owner’s draw, so that you are able to cover your payments when your revenues fluctuate. You should forecast cash flows by month for two years.
Business Plan
A lender wants to feel confident that you can be successful in your business. Your written business plan is the instrument you use to create this confidence. You will use your business plan to provide the lender with information about your experience, your proposed business, your customers, and your competition. Your plan should be thorough, yet concise. Don’t get bogged down in too many details and don’t include charts or graphs unless they actually provide useful information. To learn more about writing a great business plan, please read our blog, “Importance of Developing Your Business Plan”.
Additional Information
In addition to your business plan and two-year cash flow forecast, you will need to include several other documents in your loan package. These include:
- Resumes for yourself, any other owners, and key employees.
- Projected balance sheets and income statements for the first two years of planned operations.
- Lease proposal that provides details on the lease you plan to sign.
- Quote for the insurance coverages you will purchase.
- Articles of Incorporation or Articles of Organization for your business, as well as your corporate bylaws or operating agreement
This list may seem a bit daunting. Don’t be discouraged. Help is available from your local SBDC center. If you are in the Fredericksburg area, middle peninsula, or Norther Neck, please reach out to the UMW SBDC for assistance by completing a Request for Consulting form on our website: www.umw.edu/sbdc