Imagine this scenario. Your neighbor shows up at your front door one winter afternoon and asks if he can borrow your snowblower. You say “sure”, and proceed to ask if he knows how to use it. He responds, “I don’t think so.” Even though you find this comment a bit odd, you want to be a good neighbor so you provide a quick demo.
Next, you ask him how long he will need it. He responds, “probably several years…and I am not really sure when I will bring it back, or, if I ever will.” At this point you probably change your mind about being so friendly and your neighbor stomps away and heads toward some other house on the street.
You might have trouble imagining this kind of conversation but something not too dissimilar takes place quite often between business owners and potential lending institutions. All small businesses need money and most have a need to borrow occasionally. All bankers want to be good neighbors, help you solve your problems and to participate in your growth. However they definitely want to be assured that you know what to do with the money and that you have a plan for using it.
Most definitely they want to be assured they are going to get their money back and on a timetable that works for them. Toward this end your banker will begin to ask for a blizzard (no pun intended) of paperwork. The type of material needed will vary based on the nature of the loan (working capital/line of credit, capital expenditure, investment property, etc) but will probably require such things as:
- Three years of financial statements – preferably audited or reviewed by an outside accounting firm.
- Current year to date interim statements
- Three years of corporate and/or personal tax returns
- Capital expenditure plans
- Current accounts receivable aging
- Current debt schedules
- A narrative history of your business
You may be able to quickly put your fingers on all of this material. If you can…great! If you cannot, well… that is the subject for another newsletter.
Regardless, you will notice that all of this material is basically historical in nature. However, many because of heightened regulatory scrutiny, bankers are now also requiring forward looking documents such as:
- Cash forecasts
- Pro forma financial statements (based on the budgets and cash forecasts).
Going back to our original scenario, this is the part where you prove to your “neighbor” that you know what to do with the smowblower, that you will be able to return it, and that you know when you will. Your chances of getting a loan will be significantly improved if you can produce documents like these and that they are well thought out with sound assumptions.
This can be a real challenge for most small business owners. The skills of their accounting staff are typically limited to compiling historical information. The ability to forecast financial data is a unique skill but your banker will require you to make an effort nonetheless.
Don’t go in without a plan or one that wont tell your story very well. If you don’t have the skills in house, give me a call. I can help. I have many years or experience providing this kind of forecasting in a wide variety of businesses.