The Path To A Successful Loan Application Being Bankable-Establishing Borrowing Power Presented by: Caiser Hogan Vice President & Small Business Resource Officer Zions Bank
Strong Business Owners Understand the Necessary Components to Obtain Capital to Start Up or Expand Their Businesses Make an assessment of what you have on hand first. Market Research Financial Resources Understand Your Goals Potential roadblocks
Market Research Partnerships Local Resources SBA, Chamber, Networking Groups, etc. Online Resources sba.gov, yourstate.gov, irs.gov, resources@zionsbank.com,etc. Know your competition Weaknesses, potential hurdles
Financial Resources Start Up Costs Equity Sources Potential Partners Ongoing Working Capital Secondary Source (Back Up) SBA Loans, Bank Direct, Venture Capital, Micro Loans etc. (Know your options!)
Understand Your Goals Expectations? How much time to accomplish? Short term? Long term? Others expectations? Room for flexibility? Positive or negative outcome?
Potential Roadblocks Lack of funding Problems with licensing or obtaining necessary permits Business partner issues Time issues Product issues Business site/location issues Miscellaneous
Develop & Use A Business Plan Even if you don t anticipate that you need funding It is still important to HAVE A PLAN! Your success depends on it!
How To Develop and Use A Business Plan Why write a Business Plan? Essential for obtaining funding Details every step Organizes the process so important details aren t missed. Getting Started Focus on the intended reader Avoid highly technical descriptions
How To Develop and Use A Business Plan Don t make vague or unsubstantiated statements Is there sufficient demand for the product or service? Do you have a sustainable competitive advantage?
How To Develop and Use A Business Plan Are you being realistic? Determine Entity Type (S Corp, C Corp, LLC, Partnership, etc.) Consult with your tax advisor and attorney to determine the right structure.
Put The Plan On Paper Begin the plan with a summary Describe your company, its goals and objectives Describe your market strategy Describe your product/services and how they are produced Describe your management structure and organization
Put The Plan On Paper Describe the business operation Summarize your financial needs Determine your proposed financing and structure Outline future plans with realistic projections Other considerations
The Financials Cash Flow Budget Cash is King!!! It is important to understand that cash flow isn t the same thing as profitability.
Breaking Down The Balance Sheet The balance sheet is an outline of your assets and liabilities.the net difference is your equity.
Current Assets Current Assets (or liquid assets) Cash Money market savings Investment accounts Pre paid expenses A/R & Inventory (assets that can be converted to cash in 12 months or less) or during the normal course of business Current assets are typically itemized on the balance sheet in order of how quickly they can be turned to cash
Fixed Assets Assets that produce revenues such as equipment They are distinguished from current assets based on their longevity They are typically not for resale Fixed assets can include equipment, furniture, fixtures, etc. Fixed assets will vary depending on the type of business
What Is Depreciation? Subtracting depreciation is a conservative accounting practice to reduce the possibility of overvaluation. Depreciation subtracts a specified amount from the original purchase price for the wear and tear on the asset. The original cost can also include associated expenses to ready the asset for service. There are several different methods of depreciation such as Straight Lineor Accelerated depreciation. Consult your tax advisor for further information on how to choose the appropriate depreciation method for your business.
Liabilities. Good or Bad? Liabilities typically consist of claims of creditors against the assets or debts owed by the business, such as bank loans. There are 2 types of liabilities Current Liabilities Long Term Liabilities
Current Liabilities Debts that will be repaid in 12 months or less Accounts Payable (A/P) Accrued expenses Wages Taxes payable Current Portion of Long Term Debt (CPLTD) which is the current amount due within 1 year on your long term debts, etc.
Long Term Liabilities These are debts that will be paid in longer than 12 months Start up financing Bank loans on equipment, buildings or finance companies, etc.
What Is Net Worth? Net Worth is the difference between the Assets and The Liabilities Assets Liabilities = Net Worth Essentially, it is what s left over after all of your liabilities have been subtracted from the assets of the business. It is also known as Owner s Equity
Why Is Equity Important? Equity is what you are working for! Paying off debts in a business and creating equity is like paying off your car and home! If you have more liabilities than you have assets, then you have Negative Net Worth.Not a good thing.
Analyzing The Balance Sheet Let s talk about a few balance sheet ratios. Current Ratio = Total Current Assets Total Current Liabilities The current ratio answers the question, Does my business have enough current assets to meet the payment schedule of current liabilities with a margin of safety? A rule of thumb puts a strong current ratio at 2. A current ratio can be improved by things like paying down debt, selling a fixed asset or most important putting equity back into the business!
More Balance Sheet Ratios Working Capital Total Current Assets Total Current Liabilities Working Capitalshould always be a positive number. It is the test of how your business can weather the hard times.
Debt/Worth Ratio This is also called the Leverage ratio and is an indicator of a businesses solvency. It measures how dependent a company is on borrowing versus owners equity. Basically it tells how much is owned and how much is owed. It is calculated by dividing total assets/total net worth. The lower the number the better. It indicates how much debt your business has compared to equity.
The Income Statement Also called a Profit and Lossor P&L Measures a company s sales and expenses during a specified period of time. The function is to total all sources of revenue and subtract all expenses related to the revenue. It is an indicator of financial progress during that period of time. The difference after taxes is the net profit (BIG NUMBERS PLEASE!!)
Shell of a P&L Statement Net Sales Gross Margin Selling and Administrative Expenses = Net Operating Profit Net Operating Profit + (Other Income Other Expenses) = Net Profit Before Income Taxes Net Profit Before Taxes Income Taxes = Net Profit (or Net Loss )
Let s Talk Turkey Sales! Net Sales are the total sales during the time period being analyzed minus any allowances for returns and trade discounts (usually retail businesses). Cost Of Goods Sold Also called The Cost of Sales or the price paid for the products sold during the accounting period (wholesale price)
More On Cost Of Goods Sold (Also called COGS ) For service and professional companies, there will be no cost of goods sold. These types of companies receive income from fees, commissions, and royalties and do not have inventories of goods. For retailers and wholesalers, the cost of goods sold may be computed several different ways using either a direct or indirect method.
Manufacturers Cost of Goods Sold The method for computing cost of goods sold for manufacturers is different than for retailers or wholesalers because the products a manufacturer provides come from both the acquisition of raw materials to create a product and the costs related to the its manufacture. Direct Costs and Indirect Cost Direct Costs Includes raw materials, work in progress inventories and direct labor costs.
More About Direct and Indirect Costs Factory overhead includes the following: Depreciation of plant and equipment Factory utilities such as light, heat and power Insurance Real estate taxes Wages of supervisors and others who do not work directly to create the product
Gross Margin Once you have entered net sales and cost of goods on your P&L, it is then possible to compute the gross margin for the accounting period. Gross Margin is also referred to as Gross Profit. Net Sales COGS = Gross Margin
SG&A SG&A is Selling, General and Administrative Expense Selling expenses Expenses incurred directly and indirectly in making sales Salaries Advertising Shipping Etc. General and Administrative Expenses (G&A) Operating expenses not directly associated with the sale of goods G&A are often referred to as overhead and are controlled by management
Net Operating Profit Net operating profit is the difference between the gross margin and selling and administrative expenses. Gross Margin SG&A = Net Operating Profit
Net Profit Before Taxes Other income is added to net operating profit and other expenses is subtracted from net operating profit to compute net profit before taxes. Net Operating Profit + (Other Income Other Expenses) = Net Profit Before Income Taxes
Net Profit! Net profit is what is left over after you pay state and federal income taxes. Net Profit Before Income Taxes Income Taxes = NET PROFIT
P & L Summary The creation of a profit and loss statement is an important event for a small business. At one glance, it provides a summary of the most important activities of the company.
Solvency Ratios Solvency ratios measure the stability of a company and it s ability to repay debt. They give a strong indication of the financial health and viability of your business! Some Important Solvency Ratios Debt to Worth Ratio (Leverage) Working Capital Net Sales to Working Capital
Now For Financing Once your business plan is completed with financial information, market research, management resumes, projections including a cash flow statement, profit & loss, and a balance sheet, you are ready to apply for a loan
Banking On It Do you currently have a trusted financial partner in a financial institution? If so this is the place to start. If you have an established relationship they typically understand your business and industry and most importantly know your character. If not, ask for referrals from trusted colleagues.
The Meeting Schedule a meeting with your loan officer so you have ample time to discuss the process. Don t leave the meeting without a checklist of documents needed and know what the expectations are from the bank and what YOU expect from the bank.
The Loan Application Ask for help if needed. There is no such thing as a dumb question. If you fully complete the application, and provide all of the documents that were requested it improves the processing time and eliminates frustration from the back and forth.
The Documents Why does the bank need so much information when you request a loan? It is the only way to determine your ability to repay. A good loan officer will explain this to you, and you absolutely should expect this from them.
Typical Documents Requested Loan Application Forms (additional if an SBA loan request) Business Plan including financial projections outlined earlier Personal Financial Statement Personal and Business Tax Returns (complete federal with all schedules) Business Entity Documents
Why Do They Need The Personal Information? YOU ARE THE BUSINESS! A closely held company s owners control the success or failure of a business, and how you handle your personal financials is an indicator of how you will handle the business financials. Be upfront on personal credit issues, and provide an explanation with your loan request including the back up documentation. There are loan programs like the SBA that are designed to help guaranty your loan when there are some associated weaknesses. Make sure these are discussed at your meeting with the bank.
Personal Loan Guarantees Personal loan guarantees are typically a requirement especially on loans such as SBA. A personal guarantee on a business loan is also referred to as a commercial guaranty or a contingent liability to you. It simply means you have the character to step up and repay the loan if the business fails. This is also why the bank looks for a secondary repayment source and/or collateral. Loan programs such as SBA help mitigate things like a shortfall on collateral.
Loan Structure Make sure that you are applying for a loan that meets your company s true needs. If you are buying equipment then you will need a term loan. Request interest only payments up front for 3 6 months so you have a ramp up time. You will likely need some permanent working capital and your business plan and financial projections should define your exact needs.
What Happens If My Loan is Declined? Make sure that you get an explanation as to why it was declined and what it will take to get it approved. Sometimes there is a miscommunication on something between a loan underwriter and a loan officer that is preventing an approval. Make sure all of the resources such as SBA have been discussed as options. Don t give up without a plan with the bank to get APPROVED!
Summary Complete your market research and understand potential roadblocks Understand your financials including projections and budgets Develop and prepare a complete Business Plan Meet with your potential bank and get a complete understanding of the request process and your expectations as well as the bank s. Provide a complete application with all documents requested. They can t process anything until they have everything needed. It will just create a long and frustrating process if you don t. Make sure your loan request is structured for repayment appropriately. If your funding isn t approved (even after exploring all potential loan programs) understand and define what is needed to get approved.
Don t Forget Your Resources SBA.Gov Zions Business Resource Center resources@zionsbank.com Local Chambers of Commerce and Economic Development Corporations YOUR STATE.Gov IRS.Gov Your CPA, Attorney and Financial Institution
Some Tips Don t be afraid to ask for help! Seek out successful business owners in your industry and learn their methods for operating! Ask for and accept constructive criticism for positive changes that equate to $! Perseverance is Key! Celebrate your success and don t forget to always plan and budget for the future!
Thank You! Zions Bank appreciates the opportunity to share this time with you today! Best Wishes For Big Success!!