Not adequately strategizing your business financing could spell doom for your company's survival.
Many businesses initially assume that a strong business plan is their foremost requirement.
The widespread misconception is that potential lenders will heavily prioritize your business plan when deciding on the approval of the necessary financing.
Although a well-crafted business plan can certainly aid in securing financing, it ranks lower on the lender's list compared to factors such as the experience of your business management team, your track record of past business achievements, and your "lending character."
To achieve business success, it's essential to have a strategy for obtaining the necessary business capital to implement your business plan.
The absence of a feasible business financing plan is the primary reason behind the failure of 90% of all new businesses.
Your lending character refers to the lender's assessment of your capacity and stability to repay the loan.
They also evaluate how far they believe you can propel the business to maximize potential earnings, thereby increasing their chances of repayment.
The initial aspect a lender will scrutinize is how well you've structured the business and how responsible and knowledgeable your approach has been.
Are you incorporated or an LLC? If not, your application for a business loan will be rejected, and everything hinges solely on your individual status.
Have you completed your EIN, state registrations, business licenses, and bank filings accurately?
Failure to do so will lead to rejection as lenders demand meticulous attention to detail.
A brief assessment of your business credit report by a lender will swiftly determine whether you even stand a chance of being approved for financing.
If the lender discovers that you haven't taken the necessary steps to ensure your business has active reports with all three major business credit reporting agencies, rejection is inevitable.
Subsequently, the lender will evaluate the integrity of your business credit reports.
What does your business's track record reveal?
What are the payment histories like for obligations that are relatively easy to obtain, such as vendor trade lines, small business credit cards, and equipment leases?
If your business lacks credit history or has only a minimal one, lenders won't even consider your business for a larger loan, as there's no evidence of successfully managing smaller debts.
Assuming you pass these preliminary evaluations, the lender will then delve into the core of your business loan application. At this stage, you finally have the chance to present your funding request.
Regrettably, up to 90% of all business loan applications never progress to this stage, primarily because many business owners fail to complete the initial prerequisites.
So, having come this far, the next question you should pose is:
What is a lender going to expect to see?
Debt service! This is the point where the lender examines your business plan, particularly the financial section, to assess whether your business can manage the debt and make timely payments on the loan.
To make this evaluation, the lender will scrutinize the validity of your financial projections. Essentially, this means verifying if your numbers add up and if they are logically sound.
If you lack accounting knowledge, it's crucial to seek assistance. If a lender identifies basic accounting errors in your projected financial statements, you'll likely face rejection. Lenders are hesitant to provide funding to individuals who can't present a simple profit and loss statement or balance a balance sheet. There are ample resources available for guidance – make use of them.
Next, the lender will examine the market niche section of your business plan. While many business owners assume this section highlights what sets them apart from competitors, lenders view it as a space to compare you to your competition.
In this section, lenders need to see evidence that you've conducted thorough market research. Can the revenue projections you've included in your financial forecasts be substantiated by actual market demographics for your specific business industry, location, and customer base? Essentially, it hinges on the demand for your product or service.
All of this might appear overwhelming, and indeed it can be. This is why 97% of business loan applications are declined. The primary reason behind this is that business owners are not typically educated in these matters through formal schooling and often only acquire this knowledge through years of challenging experiences, often including the setbacks of failed businesses.
This will provide you with ample information to initiate the process of assembling a business funding proposal. In my upcoming article, I will delve into additional components of your business plan.
