How to Apply For a Business Loan

Here is some quick and straightforward advice on how to get a business loan today from Barbara Weltman. In today’s tough credit market, if you need a commercial loan to buy equipment or machinery or to expand your business, be prepared (and qualified) for the loan process.

Have the right numbers
While lending standards vary from bank to bank, the following is a good rule of thumb if you expect to get a commercial loan:

• Business owner’s FICO score of 680 or better. Since small business owners must give their personal guarantee for loans to their business (with the possible exception of mortgages on business property), they must have a good FICO score.
• Cash flow (or debt service) rate of 1.5. Figure the rate by dividing income by debt. Lenders want to see that income is at least 40% greater than debt to achieve a cash flow rate of at least 1.5 to serve the debt.
• Net operating profit of 15% to 20%. Net operating profit is your gross profit less expenses (selling, general and administrative costs; interest; depreciation; etc.), including officer’s compensation, provision for bad debt, and other expenses. If your gross profit (net sales less the cost of goods sold) is $1 million, then your expenses should be no more than $800,000 to produce a net operating profit of $150,000 to $200,000.

These are not the only numbers that a lender will review. Be prepared to show a balance sheet with a favorable debt-to-equity ratio, a profit and loss statement, and any other financial documents requested by the lender.

Find the right loan program
Look for loan programs that make sense for your business. The Small Business Administration (SBA) increased its guarantee and waived fees on two of its popular loan programs — 7(a) and 504 — through the end of this month (legislation could extend this). Check with SBA lenders about these programs. Find a complete list of SBA loan programs here.

If you can’t qualify for an SBA loan (one that is guaranteed by the SBA but made through a commercial lender), consider alternative financing. Key options:

• Vendor financing. If you need to buy inventory, machinery, or other items for your business, look to the seller for assistance. Vendor financing is typically short term and available on attractive terms.
• Factoring. If you need cash quickly and are sitting on accounts receivable, use them to get the cash now. Factors can advance you cash based on your receivables and can usually arrange this payment to you within a few days. Your credit history is not taken into account in factoring. Learn about factoring from Smart Money SmallBiz. Find a factor through the International Factoring Association.
• Credit card financing. If you need to buy something and expect to pay off the loan quickly, this is the easiest (though not the least costly) way to finance a purchase. Check with your credit card company for details; some cards, such as Chase’s Ink, let you choose which charges you’ll pay off immediately and which you’ll finance. View your credit card options at LowCards.

How To Conduct A Feasibility Analysis On Your Business Concept

Here is a robust checklist of considerations when conducting your feasibility analysis:

A. Industry analysis

-Is the industry growing?

-Who are the major competitors?

-Where are the opportunities in the industry?

-What are the trends & patterns of change in your industry?

-Are there successful and young companies in the industry?

-Are there any threats to the industry?

-What are the typical gross profit margins in the industry? (Revenues-cost of goods sold= $ left over to pay overhead)

B. Market Analysis

-Competitive Intelligence: Look at the following of your top competitors:

1. Management style of the company

2. Current market strategies

3. Unique features & benefits of their products

4. Their pricing strategy

5. Their customer mix

6. Their promotional mix

– Check information on public companies with Hoovers Online, Us. Securities & Exchange Commission, OneSource.

C. Customer Analysis

-Questions to answer your potential customers:

1. What are their demographics?
2. What are their buying habits?
3. How do customers hear about your product? Do they buy based on TV ads, magazines, Internet advertising, word-of-mouth, referrals?
4. How can our new product meet customer’s needs?

Manufacturer       Distributor     Retailer         Consumer

-The easiest way to identify the customer is to find out who pays you-follow the $

-You need to know as much about the end user as you do about the customer because you must convince the distributor that a market for the product exists and that the end user will buy enough products so that the distributor and retailer will profit. Thus, conduct the same research on the end user that you do on the distributor.

1. Why will you buy this product? If not, why not?
2. Why do you purchase in these locations?
3. What would it take for you to purchase this product?

D. Forecasting Demand:

–          Use substitute product to gauge

–          Interview customers & intermediaries

–          Go into limited production with a test market

E. Product Development Analysis

Design Preparation/Prototype Building & Testing/Initial Test Production/ Ramp-Up & Mrkt Intrdctn

-****Make sure your exact product and your business name is not already patented (both can be verified on http://www.uspto.gov/trademarks/index.jsp or you can hire an intellectual property attorney to advise you on patents and trademarks in existence that could be problematic)***

– It is best to involve all parties in the process from the beginning:

• Customer: By providing info on the product design and functionality you ensure they get what they need.
• Engineering: Uses comprehensive product info. To design the product correctly the first time.
• Finance: Follow production costs and warns developers if they are choosing a component or cost that will be too costly in the final product.
• Manufacturing: Makes sure a viable process for producing the product exists.
• Marketing: Keeps tabs on the marketplace to ensure that the product is well accepted when it is launched.
• Purchasing:  Establishes reliable relationships with vendors to ensure that they deliver parts on time.

The feedback that you want to solicit from all these parties is:

–          What makes the product better & easier to manufacture?

–          What does the marketplace think of the product?

–          What improves the product, its components & the way it is built?

–          How reliable is the product? Are any parts less reliable than others?

–          Are customers satisfied with the prototype?

–          How will you service the product?

–          How will you handle complaints?

–          How will you get positive publicity for the product?

• Suggestions For Overcoming Scarce Resources:

–          Begin with the product that will bring you the greatest ROI.

** Focus your energies on what you do well & outsource everything else **

–          Don’t try to manufacture products that others already do very well.

–          Purchase off the shelf parts and components, when possible

–          Research job shops that work with entrepreneurs regularly and use them.

• Designing Correctly

-Start with a good product definition

-Ask customers what they need, expect & want

– Deploy quality function

– Design for manufacturability:

-Minimize the # of parts (and electrical cables)

– Simplify components & use common or standard parts

– Design parts with symmetry

– Make parts independently replaceable

– Eliminate adjustments of manufacturing equipment, fasteners & jigs

• Sourcing Your Materials:

–          Materials & costs account for about 50% of total manufacturing costs.

–          Best to purchase 80% of your parts from main vendor & 20% from a backup.

-Questions To Ask When Looking For The Best Vendors:

–          Can this vendor deliver what I need when I need it?

–          How much will freight cost using this vendor?

–          What services does the vendor provide?

–          Is the vendor familiar with the product lines I am using?

–          What are the vendor’s maintenance & return policies?

How To Attract Investors & Find Sponsors

Maria Simone, Founder of Dream Scout, LLC has outlined the following steps to attract investors and find sponsors. Here they are:

1)      Determine your overall vision/business milestone that you would like to attain

2)      Create a budget that includes every resource you will need to reach that milestone

3)      Include operating expenses and salaries

4)      Create a funding strategy:

a)      Self-fund without jeopardizing your personal financial well being

b)      For resources or ‘human capital’, barter or offer revenue share or equity

c)       Consider employing pre-selling strategies

d)      Purchase order financing to help defray manufacturing costs

5)      Establish business credit

-Business credit is independent of your personal credit score

-Paydex: Start the process immediately

-Begin building Trade Credit by signing up for D-U-N-S # @ http://dnb.com

-Contact John Brown @ jbrown@thefundinghouse.biz, he can assist you in getting bank lines ($5K-$250K)

6) Consider attracting corporate sponsors if you are offering significant exposure to a market

-$16 Billion has been spent in corporate sponsorships

-Best bets: Heavily trafficked website, events and launches, TV/Radio Show, partnering with a non-profit

-This is a time intensive strategy-no payback to sponsors (you can ask for $5K-100K/yr)

7) Short term ‘seed’ or ‘bridge’ financing from friends and family

-You can offer them attractive returns on 1-2 year notes

8) Private stock offering for equity in the company

-ROI comes at sale of company or at IPO or if/when you pay dividends