Financial Planning and Analysis for Business requiring small business loan financing.

Most of our clients coming to us for small business loans advise have very little understanding what needs to be presented to the bank in terms of previous financial results of the company and also future financial results and projections. Important portion of the banks due diligence and assessment of for small business loan applications is 3 year financial projections, proforma balance sheet, and break even analysis for the invested funds to be repaid. In this article we will discuss several important aspects of financial analysis, underline the importance of proper information in the projections and disclose a little bit of what we do to make the deal work will with our projected results.

As with any other financing, small business loan financing  is based on previous results and future results of the company. Historic numbers are easy to work with since they are already assembled by the accountant and are presented on the dish in a form of balance sheet, income statement and cash flow statement.  Before working on this part of the business plan we normally go through historic numbers and “normalize” the statements in order to account for, one-time items that took off the bottom line, amortization and depreciation, that reduces the income normally in a straight line manner, and expenses that were unreasonable and could be accounted for a tax minimization purposes.
This is very important step for any small business loans application and business financial planning, since it shows the real picture or at least attainable picture that could be targeted and easily achieved by the owner and his business.  Once normalized financials are ready, we normally analyze the owners expectations of the performance of the business post financing. We include cahsflow modeling, inventory modeling and contracts estimates in order to see that projections are realistic. Since our firm did a lot of small business loan transactions, weather it is marketing financing, equipment financing, inventory financing etc. we have great number of cases on which we can base our projections in real life.
This is a key to being able to sell the projections as a part of the business plan and financial model of the deal to the lender who is doing this deal on unsecured basis, rarely projections showing significant upside to the business will be accepted by the lender at face value, and if projections are considered over estimated, or too good to be true, the submission has to circle back to the client in order to modify and justify the submission, which in turn creates delay in the deal, and also increases the likelihood that the deal will not be approved as lenders don’t have much patience with these deals at all.

Also very often there is a requirement of some of the funds in the projected investment or expansion of the business to be sourced from owners existing equity or cash. This requirement may be higher or lower depending on the stage the business is in, level of confidence in the business by the lender and also how solid the projections look.  For most of our clients this could be very sensitive questions, since they are looking for money when they really need them, and when the lender comes back and says that in order for their small business loan to be approved the client needs to invest say 100k of their own money up front, and client is short on cash, the process will stop right away, even though it could be otherwise.

The questions of owners equity in the expansion plan could be address properly in the business plan and financial model that we prepare for our clients small business loan submission.  Also proper use of proceeds that fits well within lenders understanding of the business and segment of the economy the business is in, might be a game changer when it comes how much equity owner invests and how much comes from the institutional lender. Very often on expansions of $250k and below we can do 100% financing of the use of proceeds, which is our ultimate goal for any client.

As usual we suggest our clients to consult with us before doing with the lenders directly, in order to use as many angles as possible to achieve the goal in the shortest time possible.

Happy Financing everyone !

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