Obtaining Bank Financing to Grow Your Business

As your business grows, you may find that you need to borrow money to finance growth, replace aging equipment, hiring additional staff, and/or to meet seasonal demands.  Obtaining a bank loan is never an easy process, even for established business with a proven track record.  Here are some tips to help you prepare to apply for a business loan and put yourself in the best position to be approved.

Financial Documents Needed:

In the business world as well as in the SBA World – “cashflow is king”, meaning that your business needs to generate enough cashflow to repay proposed debt. To support your ability to make debt payments, a lender will need:

1. Business Tax Returns for past two or three years
2. Profit & Loss Statement for past two years and current year-to-date
3. Balance Sheet for past two years and current year-to-date
4. Debt Schedule (if your business has existing debt)
5. Projected increases in revenues and/or changes in costs expected from the changes undertaken.
   1. An expansion should be expected to increase revenues.
   2. A debt consolidation or refinancing loan should reduce interest and loan payments.
   3. Replacing antiquated equipment may lower maintenance and repair costs and increase efficiencies.

Loan Request:

1. You need to know how much you need and what it will be used for. What type of SBA loan is right for you?  Micro, 7a, or 504 loan. Ask for the loan.  State the amount of the loan being sought in the cover letter to your business plan.
2. If you will buy new equipment, provide specifications and written quotes. If you are expanding into ecommerce and need money for a website and increased inventory, provide details on these projected expenses.
3. If you need to move to a larger space, or open a second location, provide supporting documentation, such as:
   1. Proposed lease
   2. Two or three quotes for build-out work to be done
   3. Quotes for furnishing and equipment for new/larger space

Written Business/Expansion Plan:

1. Include history of business and planned expansion or changes
2. What type of expansion are you planning? Will you:
   1. Introduce new markets
   2. Open a new location
   3. Try to reach a new customer segment
3. How will expansion help you grow your business?
4. If you are making changes to your business model, explain how they will help you reduce costs, increase sales, or operate more efficiently.

Strong Projections:

1. Project increases in revenues that will result from the expansion.
2. Include assumptions for how you estimated the increase in revenues.
3. Forecast costs that will increase due to the expansion.
   1. Will you need to hire additional employees?
   2. Will your rent increase due to a larger space or second location?
   3. Will your insurance premiums increase?

Good Personal Credit/Debt Repayment History.

1. In the world of small business, business credit is heavily reliant on business owner credit. Even though your business might have a credit history, your personal credit will be the major factor in this decision
2. You should not have any recent bankruptcies or tax liens outstanding.

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% and maybe as much as 20% of the expansion costs from retained earnings or 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.

If you are planning to apply for a business loan, we recommend you develop a relationship with a commercial lender before you need the money and you work with a lender with a proven track record of financing businesses in your industry.  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 [email protected] 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.