Getting Your First Business Loan

Posted on May 21, 2013.

I’ve been fortunate enough to teach a couple of classes at Walter Reed through the 100 Entrepreneurs Project.  The program provides valuable information and visits from real business owners to wounded veterans who want to start their own business.  Needless to say, financing is often top of mind.  

I hated to be the bearer of bad news, but the reality is that it’s really hard, actually nearly impossible to get a bank loan for a start up. Here’s what banks like to see:

·      2- 3 years of financial statements.  Specifically, they need 2-3 years of operating profits.  So the first thing you want to make sure you do is create your monthly profit and loss statement and balance sheet.  Don’t know how? Outsource it, but don’t wait until you need the money to pull together invoices and re-create the wheel. You may think, “Who would do that?”  I’ve seen it too many times to count. And don’t do this once a year at the end of the year. The bank will want to see any interim statements and accounts receivable agings or inventory reports.

·      2-3 years of tax returns. Again, you might be surprised at how many entrepreneurs fail to file all the appropriate tax returns, filing fees, payroll taxes, etc.  The bank will order a certificate of good standing to make sure you have files everything correctly and on time.  Tax returns are especially critical for most new companies, as it’s likely you don’t have accountant prepared statements or you only have compiled statements. Bankers take comfort in the fact that if you told the IRS you made xxx, you probably did.

·      Personal Financial Statement.  You will be required to personally guaranty the loan.  Have a listing of all the assets you own by yourself and those you own with a spouse or others.  If you have joint liabilities, you have to include all of them.  The reality is that if your spouse doesn’t own any of the business, the banks can’t require your spouse to guaranty. BUT, if the assets you claim alone fail to give the bank the comfort they desire, they can ask you to provide some enhancement, which is a round about way of adding your spouse.

·      Projections.  Depending on what you need the money for, the bank may require that you prepare some financial projections.  If so, have your accountant do at least two scenarios, most likely and worst case. The bank will be impressed that you are recognizing that things may not go as plan and that you’ve prepared for the possibility of a hiccup.

The list above is very simplistic and if you’re a start up with venture or angel money, you may not need to guaranty the loan.  But I’m often surprised at how many people think they can get a bank loan with a great idea and a purchase order. It just doesn’t work that way. Yes, there are some people in the lucky DNA pool who have a rich relative with deep pockets that will guaranty the loan or provide cash collateral, but that really is the exception.