If you have ever attempted to start your own business, then you probably already know that having access to good financing is crucial to getting things started correctly. Though it would be ideal if you could just fund your business venture without the help of an outside source, most entrepreneurs lack the investment capital to get a business off the ground without some sort of small business loan. Furthermore, giving your new business all the tools to get started quickly will generate more revenue than trying to slowly grow your business over time.
With all that said, getting your business financed isn’t always an easy task; especially if you’ve never done it before. There are a lot of things that you’ll need to have in place before a bank will even consider giving you a loan, so I’ve created this basic guide to outline the steps to getting your business financed for a first time entrepreneur.
The Business Plan
The most important thing that you’ll need to put together in order to get a business loan is your business plan. If you’ve never put together a business plan before, you should consider getting the help of a professional consultant to make sure everything is done correctly. Essentially, a business plan will outline every step of your business from where you’re going to sell your goods to how profitable you project your business to be in the first years. For example, if you were starting an online wedding sparklers store and needed financing, you would outline the costs of your products, operating your website, the marketing costs, and what you expect for sales based on the size of the market.
Though each type of business will have slightly different information included in the business plan, there are some basic things that all business plans should include. Here is a breakdown of each section.
- Executive Summary – essentially your “pitch” for how the company will be successful.
- Company Summary – a description of all the facts related to your company such as its history and a bio on the owners.
- Products/Services – a concise description of your products/services and what separates them from competitors who are already in the market.
- Market Analysis – a summary of who will buy your products/services, your competition, the size of the market, and how much you expect the market to grow.
- Strategy and Implementation – a description of how you plan to market and sell your products/services as well as establishing ways to measure your success.
- Management Summary – a complete description on the qualifications and skills of your management team and what makes them able to take on the competition.
- Financial Plan – a report on all the existing financial data such as sales, cash flow, and total profits.
What the Loan Pays For
When pitching your plan to a lender, you need to keep in mind that there are things that justify a good investment and things that throw up red flags. Things that lenders are willing to invest in include new inventory, manufacturing equipment, and even the purchase of a new retail location or facility. The reasons these things are attractive for an investment is because they can be liquidated in the event your business is not successful; meaning that some of the investment capital can be recouped if things don’t work out in the end.
Things that lenders do not want to invest in are payroll expenses, previous investment repayment, and expenses such as building leases. To put it bluntly, investing in business elements that have zero chance of a return if your business doesn’t succeed is not appealing to an investor. You can invest profits that are gained by their initial investment into these types of expenses, but typically not the initial investment itself. By refining what the loan will pay for into things that have real world value, you can greatly improve your chances of getting a loan after a business financing company reads your business plan.