The information in this article is for educational and informational purposes only and should not be relied upon for decision making. Always seek the expertise of a professional advisor or accountant prior to making any decisions.
For the same reason you wouldn’t give money to a stranger, banks won’t lend funds to your business just because you say you’re a good person. Like you, banks are most concerned with getting their money back; second to that is the opportunity to make a profit on it. Banks work by taking funds on deposit from people and businesses that don’t need it right away, and then lend the same money to people and businesses that need it now. Banks make a profit on any interest charged on the lent funds. When a person or business doesn’t repay their loan, called a default, the bank loses their loan in the transaction.
Getting Funding from the Bank
Before approaching a bank, you should first weigh the pros and cons of obtaining this kind of funding. Banks are different than investors in that they lend you funds rather than investing them in your business. With a loan, there is an interest rate charged on the funds lent to you and the expectation of a repayment on a fixed schedule. Whether your business makes money that month or not, the bank will expect its loan re-payment. This is different from most investors who fund your business in exchange for ownership and understand that their funds are at risk if the business doesn’t succeed.
Unfortunately, it’s often not easy for an early-stage business to obtain a loan from a bank. From the bank’s perspective, it’s similar to being approached by a stranger asking for money to start a business. For that reason, you’ll likely need to put up either personal or business collateral to obtain the loan. Collateral is something the bank can take ownership of and sell in the event that you default on your loan and the bank needs to recoup its loaned funds. If your business has been operating for a while already, then you might have some business assets you can put up as collateral. However, if you’re a new business you will have to put up something personal, such a property or other valuable assets that the bank is willing to accept as collateral.
Based on the considerations above, you should take the time to explore all your funding options before committing to sourcing funding solely from a bank. Other options can include support from investors, grants, funding from family and personal funds. By diversifying your funding sources, you can reduce the amount of funding you need from the bank and increase your overall chance of getting the seed capital your business needs. This strategy may also provide you more flexibility since investors often have a longer term horizon in mind to get their funds back (but you’ll likely have to give up some ownership of your business as a result).
Creating a Good Business Plan
A good business plan will not just benefit the bank, but also yourself. Your plan should be regularly updated to factor in the most current operating environment and operations of your business. Key things to include in your business plan are:
- Introduction and Overview – What is your business about? The quick pitch.
- Who – Who is the management team and other key people on your team? Why should the bank trust them to run a good business?
- Environment – What kind of market and industry is your business running in and how is it in a position to succeed? What makes your business unique/different?
- Plans – Include information about your marketing, operating and other strategic plans, and explain how you plan to execute these in order to succeed. Cover things like target market, pricing strategies, advertising and key operations plans like any hiring, manufacturing or procurement you need to do.
- Finance – Include detailed financial information. You’ll want to include a Statement of Financial Position (Balance Sheet), Statement of Operations (Income Statement) and a Statement of Cashflows looking forward as well as any historic information as well. If you don’t know what these are or how to put them together, get help. Bookkeeping software like Intuit QuickBooks is designed to help business owners streamline this process. This will help both you and the bank evaluate the finances of your business. Make it realistic.
There are other industry-specific things you can include in your business plan based on the type of business you’re running. Plenty of templates are available online, such as those through the BDC or the Canada Business Network. If you want to ensure you include everything your bank expects, visit the small business section on your bank’s website and see if they offer additional information or call your banker directly.
Demonstrating Financial Literacy Can Improve Your Chances
Financial information is often the first thing – and sometimes the only thing – that banks will look at when assessing your business loan request. Providing high quality financial information that is realistic and shows the bank that you know what you’re doing will greatly increase your chances at being approved for a business loan.
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