BY: Benjamin L. Swanson
You are ready for the next big steps for your business. Congratulations! Whether you have mastered a new product or service and are ready to start selling, need to purchase your first piece of major equipment, have an opportunity to purchase a season’s worth of supplies at a discount, are finally able to purchase your own real estate or the ink has been dry for an hour on that shiny new business plan, it is clear your company is ready for the next level. The other thing that has become clear is that you are going to need some help, and it is time to pursue financing. So, time to head to the bank right? Well, maybe. You may be ready to take the next steps for your business, but that first step is not straight to the bank. There is an exception to this that we will come back to later, but first we are going to walk through the steps before your next steps.
If the first step does not lead you straight to the bank, where does it lead you to?
Mostly likely back to your desk. Before you go to see your banker there are a few questions you should ask yourself or your team of advisors
in preparation for your first meeting. What will your banker want to know? Your company’s story? Absolutely, but their primary concern is going to be how you plan to repay the financing request. Questions you should be prepared to answer in regards to income include:
- What will you be gaining with this financing?
- How does it improve your business?
- Will it improve production or sales?
- Will it create efficiencies?
- How are those gains going to affect your income stream?
Additionally, in regards to expenses you need to assess the following:
- What is this financing going to cost you?
- Do you have enough surplus revenue to afford the related payments?
- Will this addition generate enough additional income to pay for the related payments?
- Are there additional expenses associated with this step such as installation?
- Moving costs.
- Training, or ramp up time.
- Will you have to adjust other income or expense streams to make this next step financially feasible?
You may be confident that these next steps are appropriate, but if you are not prepared to answer how your proposition will affect your earnings, you need to sit back down with your numbers.
The second step is to evaluate the timing.
You may have a need for your business, but is the best time to fill that need right now, or is it something you are going to have to work toward in the future? What a bank is going to consider as good timing, is a time where your business has the liquid assets available to afford your next steps. Your bank does not want to provide financing for 100% of the cost of your next steps, they will want you to shoulder some of the expense. Most scenarios will require you to pay for at least 20% of that cost, and even if they do not, that is usually a good benchmark for yourself regarding the timing of your next steps. If you cannot afford to invest your own funds in this project for at least 20% of its expense, you may not be ready. Another point to remember as you prepare to go see your banker is that you are making a request. You are going to ask the bank to use their funds as an investment in your business. Usually for a specific asset. They will ask for a return on this investment, but their decision will be made on the strength of investment opportunity. If you are also willing to invest your funds in this opportunity, it not only lowers the risk for the bank, it also shows that you believe in the strength of the investment. Another component of good timing is when both you and your business are free of anchors. These anchors are metaphorical, and might consist of other debt that is a burden on your cash flow, past situations that may still show on a credit report such as collections, unpaid taxes, or other defaults, or a legal situation that may be unresolved in the courts. Some of these things are common sense, others are unavoidable, and others may be easy to overlook.
But what about the exception?
The exception is when your first next step takes you right to your banker. I know I said you need to prepare yourself for that meeting by being ready to answer those questions, and you do, but you may not be able to answer them all on your own. Remember, your banker is available for more than just taking loan applications; they are great assets for discussing business plans. Bankers ask and answer these questions every day, and should be more than willing to help you prepare for your next steps. If they are not, you may need to call another banker. Maybe you are stuck on cashflow or projections. Maybe you are going back and forth on deciding if the timing is right. Call your banker. Set up an appointment. Talk it through. Most often your banker is better positioned to help earlier in the process than by the time you are ready to make a formal loan request. And, bankers are not the only ones. The best structure for your next steps may involve a subsidiary entity, or a real estate holding company. If that is the case, you will want to have the same conversation with both your CPA and your attorney. The tax implications of depreciation have changed this year. This may or may not improve your timing, and your CPA will be able to give you the best opinion. These professional service providers are all working for you. Do not be afraid to use them.
The next steps for your business are always exciting. They will stay exciting longer, and do more for your business, if they are taken with care at the right time. If you can answer the questions outlined here, you may be ready for those next steps. I only say "maybe" because every situation is different, and I am sure there are other implications with these next steps for your business. Take the time to think about them. Ask questions. Run scenarios. Call your banker. Again, congratulations on being ready for those next steps, but do not skip the steps before your next steps.
Want to talk your next steps through with a banker? Give us a call at (855) 256-7328 and talk to one of our business bankers
to help you through your business' next steps.