If there is a question I am asked most often, it would be something like “What does it take to get a loan these days?” The commercial lending environment is not what it was four years ago, and some parts of the country have seen serious problems with local and regional lenders. In honesty I have to say that the lending environment in the Upstate is still fairly strong. That is, many good deals are still getting done.
So the question becomes “Why are some businesses able to secure debt financing and others not?” The answer to that question is that some businesses just get it. Others don’t. What do they get? They get the relationships between their business plans, business financial statements and personal financial statements. Let’s take a quick look at each of these and how they are related.
A business plan is critical to guiding your business, helping you identify new opportunities and avoid pitfalls. To the potential lender the plan shows that you are on top of your game, you know the market, and you have a proven way to connect with customers who value your product or service. Further it shows how you differentiate yourself from the competition, how you respond to changes in the market and your vision for the future.
The financial statements of your business show your ability to carry more debt, how the business invests money and how the business is managed. Clearly the Cash Flow Statement indicates if the money is available to meet obligations as they come due and to make new principal and interest payments.
The Income Statement shows sales trends, gross profit, labor costs, owner’s compensation and other fixed and variable costs. A lender will look for how you protect margins on your product or service, how you control overhead costs and for reasonable compensation of owners and labor, often in the context of regional or national datasets for a specific industry. These factors all reflect how a business is managed in the context of your marketplace.
The Balance Sheet gives a look at how the business has invested money into productive assets and how the business is capitalized. It answers questions such as: Are assets aging (fully depreciated)? Is debt out of line? Are inventory levels appropriate? Are the suppliers paid on time? Has the business been profitable in the past? Has the owner drained all the cash from the business? Importantly it shows the ability of the business to absorb more growth. Remember that sales growth also means more money tied up in inventory and receivables, so enough cash must be available to grow.
A Personal Financial Statement is basically a personal (or household) balance sheet with a few extra details. It shows a borrower’s ability to collateralize a loan, sources of income and personal savings. While business loans aren’t made solely on the net worth of the borrower, it is important for the lender to see that borrowers have the ability to absorb some short-term losses in the business. A personal financial statement sheds light on the past behavior of a borrower without directly consulting credit scores. The individual with a high level of personal debt tends to operate his or her business with excessive levels of debt, and will require a greater cash reserve. Likewise, the sound management of one’s household and the ability to save and invest in good times is an encouraging sign to a lender.
So now let’s connect the dots… A personal financial statement, as a tool to understand the potential borrower, communicates either comfort or concern to a lender. It shows how successful the individual has been in the past at managing their financial life. Most people manage a business in a similar way. The financial statements of the business show how effectively the business has invested in productive assets (land, labor, equipment and inventory) and how carefully the business is managed on a monthly basis. In addition we see the ability to absorb growth and repay all obligations. And the business plan shows the lender that you know where you are coming from and where you are going. It really is good when a plan comes together.
If you need assistance creating your own business plan or learning more about the relationships among the plan and financial statements, please contact the Greenville Office of the Clemson Small Business Development Center at:
55 East Camperdown Way
Greenville, SC 29601
By Appointment Only