These days, it is not uncommon for entrepreneurs to run aground because they are unable to anticipate their daily financial needs. They draw up a financial business plan, but it does not take daily cashflow needs into account. Did you know that most new businesses that vanish within their first two years fold due to cashflow problems, not profitability? After all, entrepreneurs have a lot of bills and salaries to pay even before their first revenues come into sight.
To assess daily/weekly needs, you will need to draw up a liquidity plan: a chart that shows all outgoing and incoming payments expected in the first (and following) years, broken down month by month. Bank financing is often an easy solution to liquidity-related issues. Easy, yes. But not always that easy to get. Bank financing can also come into play for a rent guarantee, to fund a commercial space or to rent a vehicle via a finance lease.
Which elements are key for convincing your bank to get behind your business model?
What you need to realize is that a bank is a company similar enough to your own. You sell a service or product; a bank loans money. A bank’s income is derived in part from the interest you pay them, so bankers do everything in their power to make sure they’ll recover the loaned money.
In a bank, every client who takes out a loan is a potential financial risk. The bank representatives you deal with use your figures, comparing them to statistical data, to back up their decision. In theory, the higher the financial risk, the more your loan will cost you (and the higher the interest rate will be). That is why it’s in your best interest to provide all tangible information to your bank, to give your banker confidence and demonstrate a certain degree of security - which will help you get a better rate. If you want to use your banker’s frame of mind to your advantage, provide hard data in figures from the very beginning of your loan application process.
What documents should you show?
Your business plan or business model canvas complete with a 3 to 5-year financial plan. It’s up to you. What really counts is having a business plan. To clear things up, the main purpose of a business plan is not to persuade banks and potential investors – it’s to help you! The way I see it, a business plan is an essential document when launching a business, and down the road too… and for financing large scale investments!
There are many reasons to draw up a business plan:
- above all else, you write a business plan because you need it
- your banker will inevitably ask for it
- it is essential for persuading investors
- it pledges the seriousness of your project
- drawing up a business plan is easy and inexpensive
- a business plan confronts the reality of your project
- a business plan helps anticipate risks and threats
To show your financial profitability, you will need to include a complete business plan describing your activity sector, the products/services you intend to offer, your targeted market, distribution channels… you will also need to include an accounting document (a provisional “Profit and Loss” table), presenting all expenditures (what the company will have to pay out) and receipts (what the company will earn). This table will allow your banker to determine your debt capacity.
How to prove your creditworthiness?
- Equity:
To a bank, an injection of own funds is proof you believe in your project, that it’s viable and realistic. It testifies as to how serious and committed you are and limits the bank’s risk exposure.
- Offer collateral:
- Banks always require collateral. Collateral-free loans are extremely rare and near impossible for an entrepreneur.
- Propose collateral: a building or apartment you own, personal securities (personal liability), third-party guarantees (mutual companies, the European Investment Fund).
Which assets to promote:
What is most important in your project is your personality. Put yourself out there. You are the project holder and the banker will want to assess your worth. So don’t forget to tell them about yourself and showcase the value you bring to your project: your qualifications, training, professional experience…
In short, the key items for your bank/investor meeting are:
- Being prepared
- Having good knowledge of your file
- Ensuring your application is complete and up to date
- Presenting realistic figures (draw comparisons with competitors, ask that they be verified by an expert…)
- Being realistic!
This article has been written by Jean-Luc Bermes, head of the SME division at Spuerkeess, as part of the collaboration between Spuerkeess and nyuko.
