Obtaining Bank Financing for Your Start-Up Business

One of the biggest challenges facing owners of new businesses is finding the funding they need to launch their business.  Commercial lender Dennis Wagner of First National Bank provided us with these tips on how to develop a loan proposal that a banker will approve.

Strong Business Plan.  You MUST submit a written business plan.

  1. Your plan should answer these questions about your company:
    1. What products and services will you sell?
    2. Who will your customers be? Be specific.  Most of your sales will be made to the best 20% of your customers. Who are those customers?
    3. What is your background in this industry?
    4. Why are you the person to run this company?
  2. Just as important, you need to answer why there is a need for this new company and then support your reasoning with as much data as you can.
  3. Your goal should not be to make the business plan as long as possible – but rather, how effectively you can answer these questions.
    1. Be concise but complete.
    2. Do not explain standard financial terms, such as assets and liabilities.
    3. Do explain terms and acronyms that are specific to your industry.

Strong Projections

  1. Forecast revenues by month for 24 months.
  2. Explain each revenue categories.
  3. Include written assumptions on how you came up with your projections.
    1. How many customers do you expect to have in a certain time period? The time period is typically a day, a week, or a month.
    2. How much will the average customer spend?
      1. If you are opening a food service business, you need to estimate sales per customer for each meal (breakfast, lunch, and dinner).
      2. If you are a consultant, you need to provide information on your hourly rate and how that rate compares to your competitors’ rates.
    3. Include research to support your projections.

Loan Request

  1. You need to know how much you need and what it will be used for. Ask for the loan.  State the amount of the loan being sought in the cover letter to your business plan.
  2. Example of what to do: I need $500,000 to start my company – $300,000 will go towards building out my space, $100,000 will go towards the purchase of equipment and the remaining $100,000 will be used as working capital to help my company grow.
  3. Example of what not to do: I think I need about $500,000 to start my company and pay expenses.

Maintain Good Credit

  1. You need to have good or excellent credit. Check your credit score AND your credit report.
  2. Take care of credit issues BEFORE you apply for a loan.
    1. Correct errors.
    2. Pay off those debts that you can.
    3. Develop a formal plan to make payments on debt sent to creditors.
    4. Pay all bills on time. If you cannot pay the full bill, be sure to make at least the minimum payment on time
  3. No Bankruptcies/Tax Liens, etc.

Strong Personal Balance Sheet

  1. You will be required to complete a personal financial statement.
  2. You need to able to cover at least 10% of the start-up costs from your personal funds. The banker will look for sources of funds to verify this ability.
  3. You will need to have some collateral to support the loan. The banker will be looking for assets that provide strong collateral.
  4. You need to demonstrate that you are living within your means. Many personal loans and credit cards with outstanding balances will be a red flag to the lender.
  5. Preferably have sources of outside income from another job, spouse’s job, retirement, or real estate investments.

If you are planning to open a business in the next six months to two years, now is the time to start working on improving your credit score, saving money to put into the business, doing research on your industry, and developing your business plans.

If you are planning to apply for a business loan, we recommend you develop a relationship before you need the money and you work with a lender with a proven track record of financing start-up businesses.  Dennis Wagner is one such banker serving our region. Dennis is Vice President, Business Services Manager for First National Bank in Midlothian, Virginia.  He can be reached out wagnerd@fnb-corp.com or by phone at (540) 850-7799.

The University of Mary Washington SBDC can assist you.  If you need assistance and you are not a client, please go to www.umw.edu/sbdc to complete a Request for Consulting form.