Do Your Homework Before Seeking a Business Loan

The following is a Q&A with Breen Bannon, Vice President & Senior Relationship Manager, Farmers National Bank.

What is the first step entrepreneurs need to take in determining how they will fund their business?

Well, hands down, the easy answer is determining how much money you’re going to need to start and operate your business.

The hard part is figuring out exactly how much you’re going to need to purchase equipment, for working capital to get the business up and running, for soft costs to get the doors open, and if building improvement funds are needed.

You need to know exactly how much it’s going to cost you. And once that amount is known, you will need to know where you are going to get these funds.

What are some of the different sources of funding?

There are only three places to get funding for a business. The first is you: funds from yourself, the business owner, which would also include investors in your business.

The second place is through loans or grants. Those can either be through local government sources, traditional loans through banks, or some type of grant program that is usually administered through local business development programs.

Then lastly, through your suppliers through trade credit, such as your suppliers letting you pay for the items or material you use to make your product after it is sold.

What’s the advantage of self-funding as opposed to getting money from investors?

With self-funding, you still retain control and ownership of your business. You are the 100% decision maker and run your business as you see fit. Hopefully you’re knowledgeable about the industry and can make the right decisions to achieve business success.

But there are times when the owner may have a great idea, but he has no business sense whatsoever. And this would be a good time for an investor, who could help run the business side and afford the “idea man” the time needed to continue to develop products or invent new ones

I think everybody’s familiar with “Shark Tank,” the show where potential investors buy into businesses. The Sharks have expertise in a certain industry or have a niche in the market. They have the ability expand on the business owner’s ideas because they have business connections and the financial horsepower behind them. That knowledge and power can come at a price, though. You’re trading off the decision-making and ownership of your business to someone else.

How should an entrepreneur approach a small-business loan?

Well, going back to the first question, once you figure out the sources and uses of funds needed for the business, lenders are going to want to see a detailed business plan. That’s a plan that shows that you really did your homework and have identified the ways in which you will make your business succeed.

Secondly, as part of the business plan, you will need revenue projections, which is how you’re going to generate sales and the expenses that you will incur to generate the sales. That could be daily, weekly or monthly projections.

How much will you sell? How much will it cost you to sell that product? That will lead to a break-even analysis. So you can understand how much you have to sell to keep the doors open.

Projections of the income and expense will also help you understand how long it is going to take to reach that needed sales volume.

This dovetails back into how much you’re going to need to operate your business until it becomes profitable.

What is the role of a commercial lender as it relates to working with entrepreneurs?

Lenders are there to help you work through financial projections, to make sure all the numbers make sense, and that things add up.

Lenders should have the expertise in the market to find the proper avenue that will match a loan program that fits the need of the borrower. This includes understanding the various loan programs offered through the U.S. Small Business Administration as well as local agencies such as Valley Partners and the city of Youngstown. Lenders then help guide the borrower through the process.

How can commercial lenders help businesses to obtain working capital?

We get that question a lot. First, we have to define working capital and narrow the scope.

Is it payroll? Is it rent? Is it to purchase raw materials? Is it to pay a franchise fee?

Why do you need the money?

Lenders will discuss that and try to match a loan that fits the working-capital need, whether it’s a short-term or long-term loan. They’ll make sure that repayment of that loan is going to fit in with your financial projections.

What else about funding a business should every entrepreneur know?

If you Google search “small-business loans,” you’re going to see a barrage of advertisements that offer to loan you money. Just be careful and read the fine print. Many times these loans are not what they seem and can be extremely costly.

Also, be careful about overextending your credit cards. That’s such an easy way for a business owner to get some startup cash. But credit cards can be very difficult to repay.

Best to talk with a local commercial lender for advice.

Also, do your homework. Get a thorough business plan together. You can never have too many details. Overthink the projections. Ask yourself many ‘what-if’ questions and know what you’re getting into before spending your life savings on funding your business.

Make sure that you don’t get yourself in financial trouble in the long run.

A lot of helpful planning material is available online. And when I say do your homework, that can be online research of SBA loans. Most of the details about SBA loans and forms to complete are available online.  

Maybe look at a franchise business. There is value in franchises because they help you with the business plan. They know what works for their niche in the market. And I’d like to mention Score, which is a resource for entrepreneurs.

Score is a network of usually retired executives who have experience running a business. They are volunteers. So there are no fees, and they help to develop a business plan.

We work with Score and send referrals if we get a potential borrower who just isn’t quite ready for a loan yet. Score does a wonderful job! They’ll help you figure out your business plan and make sure the numbers make sense so the business has a much better chance to succeed.

Farmers Financial Focus is sponsored content produced by Farmers National Bank.

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