BoeFly.com, the only pure online marketplace used by thousands of small businesses for almost four years, to efficiently connect with over 3,600 participating lenders. BoeFly analyzes their financing requests and compares them with the lending preferences of its network of lenders to provide this guide for business borrowers.
The basic principles set forth apply whether it is a start-up business, an acquisition, or an existing business. Small businesses can be a service business, a retail store, a wholesaler, a professional practice, manufacturing, restaurant, or a franchise.
You have determined that you need capital for your new or existing business. Capital most likely will come from two sources, investments made by the owners (or investors) and financing from lenders. Unless you have unlimited personal resources, the amount and type of financing you get from lenders will be crucial to the success of your business.
Lenders will assess the merits of your request based upon their specific loan preferences and criteria for assessing risk. Most lenders have a scoring system they use to assess business loans and pre-screen applicants. For that reason you need to be well prepared before you seek financing, understand and emphasize your strengths and mitigate the weaknesses lenders will perceive and be selective and realistic in the type of commercial financing you seek and accept. The following are the five basic steps to follow to start the process:
1. Know Your Business Score -Are You Fundable?
Before you spend too much time and money on the project, you will want to get some comfort that you will qualify for a loan.
- You probably don’t know it, but in the world of Big Data, you have a Small Business Loan Score even if you are not in business.
- Lenders use this score to screen and evaluate loan requests. The most widely used business score is the Small Business Scoring System (“SBSS”) score developed by FICO. The SBSS score is used by lenders and also by the U.S. Small Business Administration (“SBA”) for screening loans.
- Through collaboration among BoeFly, FICO and Equifax the SBSS score is now exclusively available for borrowers and prospective borrowers at bqual.boefly.com.
- The report issued at bQual.com will provide you with your SBSS score as well as your FICO personal credit score, your Equifax credit report and bQual will tell you what the score means to give you some indication of how lenders will view your loan request, your strengths and weaknesses. Pulling the score from bQual will not adversely affect your credit.
2. Have a Written Business Plan
The business plan serves several important purposes for both you and any potential lender. It serves as a roadmap for your planning and operations as well as providing prospective lenders with insight into your business and your level of understanding of what is needed to succeed. You should also look at the Business Plan as a vehicle for enticing lenders to make you a loan. There are many business plan resources available that can help you prepare your business plan or to help you write it yourself. Many franchisors will have business plan templates available for their franchisees and templates are available at SCORE.org. The business plan should be concise yet comprehensive enough to be useful for you as a guide for operating your business and for the lender to understand your business, it should at a minimum include:
- Executive Summary - A brief executive summary and description of your business, its location, its products or services, its mission, the marketplace you are serving or intend to serve, and a brief description of key personnel.
- Management and Company Structure- This section should highlight the backgrounds and relevant educational and industry experience of the owners and key employees. You should describe legal form of the entity (e.g. Corporation S Corporation, Partnership (limited or general), Limited Liability Company or Sole Proprietorship) and the date and State in which it was formed. An organization chart would be helpful.
- Products and Services- This section should provide a more detailed description of your products or services, including pricing, competitive advantages and disadvantages and any unique features or protections such as patent, trademark or copyright filings. You can include information about your industry in general.
- Market Analysis & Plan- Provide information about the size of the target market for your product and services; what is your plan for marketing to your customer base, discuss your existing and potential competitors and how you intend to distinguish your business from them. Describe your target customer profile and your plan for marketing to them. What share of the market do you hope to capture; discuss the economic trends in your target market, is it expanding or contracting and what is the need for your product or services. Local chambers of commerce and industry trade associations may be useful sources of information. You may want to include what is often referred to as a SWOT analysis (strengths, weaknesses, opportunities and threats) of your business.
- Operating Plan- In this section you should provide information about your operation and controls. Include location, physical description of the premises, equipment, personnel responsibilities, accounting and reporting systems and work flow processes.
- Financial Statements and Projections- For existing businesses you should present historical profit and loss statements for three years and the interim period as well as balance sheets. For start-ups and existing businesses lenders will want to see projections for two to three years. If you include the common financial ratios with your financials with comparison to industry standards this will greatly enhance your presentation.
3. Determine How Much Capital You Will Need
Determining how much capital you need and from what sources is a key element of your financing request. In a start-up situation you will need to factor in all of the pre-opening expenses such as organization costs, filing fees, legal and accounting expenses, leasehold costs, as well as the normal costs of operating such as equipment and inventory costs, salaries, loan costs, insurance, taxes and working capital, etc. Do not short change working capital since this will provide a buffer in case everything doesn’t happen as you planned (Murphy’s Law). Once you determine how much you need, you then subtract how much you are willing to invest in order to determine how much of a loan you need. In a start-up situation you should be prepared to invest 20% -30% of the capital required.
4. Determine The Best Type of Financing To Meet Your Needs
The type of small business loans or commercial financing you need and qualify for will in large part be determined by the intended use of the loan proceeds, the collateral available and of course your creditworthiness (know your score). You may need more than one type of financing, from the same or different lenders. If you are buying equipment or a building or renovating your premises, you would look for a term loan that would enable you to pay it over the useful life of the asset being acquired. SBA and conventional bank lenders are the primary sources for this type of financing. Banks and alternative lenders are also available as sources for shorter term loans like receivable financing, factoring, merchant cash advances against credit card receipts, inventory and other working capital uses. Equipment lenders and equipment leasing companies also provide financing. Rates and terms vary widely from the lower cost term loans to the higher cost merchant cash advance and factoring transactions. Research your options.
5. Use The Internet To Connect With Lenders
The internet has now become an extremely valuable tool enabling small businesses to access multiple commercial lenders to efficiently obtain financing on the best possible terms. They are no longer limited to going from bank to bank, which is time consuming and expensive. Internet sites vary from lender sites, which limit you to none lender, lead generation sites that sell your information to multiple lenders, brokerage sites where the broker will attempt to place your loans or matching sites, like BoeFly.com that will match your request with multiple lenders similar in concept to dating sites like match.com, where you control the process.