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Starting a Business Guide
Are you cut out to be an entrepreneur? And do you know all the steps to get your new business off the ground? Get expert advice here.

North American Industry Classification Codes (NAICS)

When applying for a loan, you must prepare a written loan proposal. Make your best presentation in the initial loan proposal and application; you may not get a second opportunity.

Always begin your proposal with a cover letter or executive summary. Clearly and briefly explain who you are, your business background, the nature of your business, the amount and purpose of your loan request, your requested terms of repayment, how the funds will benefit your business, and how you will repay the loan. Keep this cover page simple and direct.

Many different loan proposal formats are possible. You may want to contact your commercial lender to determine which format is best for you. When writing your proposal, don't assume the reader is familiar with your industry or your individual business. Always include industry-specific details so your reader can understand how your particular business is run and what industry trends affect it.

Description Of Business

Provide a written description of your business, including the following information:

Type of organization
Date of information
Product or service
Brief history
Proposed Future Operation

Management Experience:

Resumes of each owner and key management members.

Personal Financial Statements:

SBA requires financial statements for all principal owners (20% or more) and guarantors. Financial statements should not be older than 90 days. Make certain that you attach a copy of last year's federal income tax return to the financial statement.

Loan Repayment:

Provide a brief written statement indicating how the loan will be repaid, including repayment sources and time requirements. Cash-flow schedules, budgets, and other appropriate information should support this statement.

Existing Business:

Provide financial statements for at least the last three years, plus a current dated statement (no older than 90 days) including balance sheets, profit & loss statements, and a reconciliation of net worth. Aging of accounts payable and accounts receivables should be included, as well as a schedule of term debt. Other balance sheet items of significant value contained in the most recent statement should be explained.

Proposed Business:

Provide a pro-forma balance sheet reflecting sources and uses of both equity and borrowed funds.


Provide a projection of future operations for at least one year or until positive cash flow can be shown. Include earnings, expenses, and reasoning for these estimates. The projections should be in profit & loss format. Explain assumptions used if different from trend or industry standards and support your projected figures with clear, documentable explanations.

Other Items As They Apply:

Lease (copies of proposal)
Franchise Agreement
Purchase Agreement
Articles of Incorporation
Plans, Specifications
Copies of Licenses
Letters of Reference
Letters of Intent
Partnership Agreement


List real property and other assets to be held as collateral. Few financial institutions will provide non-collateral based loans. All loans should have at least two identifiable sources of repayment. The first source is ordinarily cash flow generated from profitable operations of the business. The second source is usually collateral pledged to secure the loan.

The 5 C's of Credit:

Your bank is in business to make money. Consequently, when a bank lends money it wants to ensure that it will be paid back. The bank must consider the 5 "C's" of Credit each time it makes a loan.

Capacity to repay is the most critical of the five factors. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on existing credit relationships - personal and commercial - is considered an indicator of future payment performance. Prospective lenders also will want to know about your contingent sources of repayment.

Capital is the money you personally have invested in the business and is an indication of how much you will lose should the business fail. Prospective lenders and investors will expect you to contribute your own assets and to undertake personal financial risk to establish the business before asking them to commit any funding. If you have a significant personal investment in the business you are more likely to do everything in your power to make the business successful.

Collateral or guarantees are additional forms of security you can provide the lender. If the business cannot repay its loan, the bank wants to know there is a second source of repayment. Assets such as equipment, buildings, accounts receivable, and in some cases, inventory, are considered possible sources of repayment if they are sold by the bank for cash. Both business and personal assets can be sources of collateral for a loan. A guarantee, on the other hand, is just that - someone else signs a guarantee document promising to repay the loan if you can't. Some lenders may require such a guarantee in addition to collateral as security for a loan.

Conditions focus on the intended purpose of the loan. Will the money be used for working capital, additional equipment, or inventory? The lender will also consider the local economic climate and conditions both within your industry and in other industries that could affect your business.

Character is the personal impression you make on the potential lender or investor. The lender decide subjectively whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company. Your educational background and experience in business and in your industry will be reviewed. The quality of your references and the background and experience of your employees will also be considered.

It is important to find out how the company is structured legally. The type of business structure used will affect your purchasing strategy as well as the eventual price.

Sole Proprietor

Under a sole proprietorship, the business is owned in an individual capacity. The assets are held in the name of the owner, individual, or individuals who own the business. When buying a sole proprietorship, you should determine if you are buying just the assets or both the assets and liabilities.


Under a partnership, the business is owned by a group of two or more entities. This could prove more difficult; therefore it is important to see the partnership agreement to make sure that the people you are dealing with have the authority to act on behalf of the partnership.


When you are buying from a corporation, it is important to determine the best way to structure the purchase. You must determine if you are going to buy the corporation itself (stock purchase) or buy only the assets, leaving the original corporation intact. In most situations, you will be much better off buying the assets of the corporation rather than the stock. The following are advantages of purchasing the assets alone:

  • It helps you avoid the liabilities of the existing business,
  • It gives you receive significant tax advantages,
  • It helps you avoid acquiring unwanted assets from the corporation, and
  • You are generally able to get a higher tax basis for depreciable assets, which means there's less taxable gain to report if you sell the assets later.

There are some circumstances when purchasing the stock of the corporation has its advantages. One common example is when the corporation has a uniquely valuable asset that can't be transferred. An example of this would be a lease with an option to renew that is not freely assignable. The availability of keeping the current location may make it more advantageous to purchase the corporation's stock.

Choosing a Business

Finding profitable businesses for sale at reasonable prices can be difficult, as business owners often have an inflated idea of the market value of their business. There are, however, many resources for finding profitable businesses for sale.


Among the many favorable aspects to buying an existing business is the drastic reduction in startup costs. In addition, cash flow may be immediate because of existing inventory and receivables. Other advantages include existing goodwill and easier financing opportunities, assuming the business has a good reputation.


Among the biggest downsides to buying a small business is the initial purchasing cost. As developing the business concept, customer base, brands, and other fundamental work has already been done, the costs of acquiring an existing business may be greater then starting a new business. Other possible disadvantages include hidden problems associated with the business and receivables that are valued at the time of purchase, but later turn out to be noncollectable.

Leasing a commercial space instead of committing yourself to owning commercial real estate can be an excellent move, but there are fewer tenant-friendly laws and no standard lease agreements. You'll need a lawyer’s help to negotiate the best deal on a commercial lease.

Every commercial lease should be in writing and should include the following details:

  • How much rent is due, including any increases (called escalations). You’ll want to know the going rate for space in the neighborhood before you begin negotiating. It also helps to let the landlord make the first offer, and ask for a lower rent than you think you can initially get. Escalations should be for specific dollar amounts or tied to a known method of calculation, such as cost of living indexes.
  • How long the lease runs, when it begins, and under what conditions you can renew the lease. A shorter lease means less commitment, but less predictability for the long run. If location is very important — for example, if you have a retail store — you may want to opt for a longer lease. You can always attempt to renegotiate lower rents or improvements as time goes on. If you have a month-to-month lease, you’ll want to make sure the landlord gives you as much time as possible when terminating the lease.
  • Whether your rent includes utilities, such as phone, electricity, and water, or whether you’ll be charged for these items separately.
  • Whether you’ll be responsible for paying any of the landlord’s maintenance expenses, property taxes, or insurance costs, and if so, how they’ll be calculated.
  • Any required deposit and whether you can use a letter of credit instead of cash.
  • A description of the space you’re renting, square footage, available parking, and other amenities.
  • A detailed listing of any improvements the landlord will make to the space before you move in. Your landlord may be more willing to make lots of expensive improvements if you’re signing a longer lease.
  • Any representations made to you by the landlord or leasing agent, such as amount of foot traffic, average utility costs, restrictions on the landlord renting to competitors (such as in a shopping mall), compliance with Americans With Disabilities Act requirements, and so forth. These may come in handy later when you want to renegotiate your lease.
  • Assurances that the space is zoned appropriately for your type of business. Of course, you’ll also want to check out this information with local zoning authorities.
  • Whether you’ll be able to sublease or assign the lease to someone else, and if so, under what conditions. You’ll want to negotiate the ability to sublease so that you can move with as little financial pain as possible.
  • How either you or the landlord can terminate the lease and the consequences.

When it comes time to renegotiate your commercial lease, you’ll want to document your reasons for a lower rent or more space improvements with hard facts regarding lower foot traffic than represented, a downturn in your industry, and so forth. Some landlords will even be willing to take a percentage of your sales instead of a flat rental fee when economic times are slow

As a tenant, you have far more leeway when negotiating a commercial lease rather than with a residential lease, which is one reason why having your own lawyer to represent you in negotiations is so important. A lawyer can also research zoning laws and local ordinances and fill you in on the local real estate market conditions and customs.

To determine if you qualify for SBA's financial assistance, you should first understand some basic credit factors that apply to all loan requests. Every application needs positive credit merits to be approved. These are the same credit factors a lender will review and analyze before deciding whether to internally approve your loan application, seek a guaranty from SBA to support their loan to you, or decline your application all together.

1. Equity Investment

Business loan applicants must have a reasonable amount invested in their business. This ensures that, when combined with borrowed funds, the business can operate on a sound basis. There will be a careful examination of the debt-to- worth ratio of the applicant to understand how much money the lender is being asked to lend (debt) in relation to how much the owner(s) have invested (worth). Owners invest either assets that are applicable to the operation of the business and/or cash which can be used to acquire such assets. The value of invested assets should be substantiated by invoices or appraisals for start-up businesses, or current financial statements for existing businesses.

Strong equity with a manageable debt level provide financial resiliency to help a firm weather periods of operational adversity. Minimal or non-existent equity makes a business susceptible to miscalculation and thereby increases the risk of default on -- failing to repay -- borrowed funds. Strong equity ensures the owner(s) remains committed to the business. Sufficient equity is particularly important for new business. Weak equity makes a lender more hesitant to provide any financial assistance. However, low (not non- existent) equity in relation to existing and projected debt -- the loan -- can be overcome with a strong showing in all the other credit factors.

Determining whether a company's level of debt is appropriate in relation to its equity requires analysis of the company's expected earnings and the viability and variability of these earnings. The stronger the support for projected profits, the greater the likelihood the loan will be approved. Applications with high debt, low equity, and unsupported projections are prime candidates for loan denial.

2. Earnings Requirements

Financial obligations are paid with cash, not profits. When cash outflow exceeds cash inflow for an extended period of time, a business cannot continue to operate. As a result, cash management is extremely important. In order to adequately support a company's operation, cash must be at the right place, at the right time and in the right amount.

A company must be able to meet all its debt payments, not just its loan payments, as they come due. Applicants are generally required to provide a report on when their income will become cash and when their expenses must be paid. This report is usually in the form of a cash flow projection, broken down on a monthly basis, and covering the first annual period after the loan is received.

When the projections are for either a new business or an existing business with a significant (20% plus) difference in performance, the applicant should write down all assumptions which went into the estimations of both revenues and expenses and provide these assumptions as part of the application.

All SBA loans must be able to reasonably demonstrate the "ability to repay" the intended obligation from the business operation. For an existing business wanting to buy a building where the mortgage payment will not exceed historical rent, the process is relatively easy. In this case, the funds used to pay the rent can now be used to pay the mortgage. However, for a new or expanding business with anticipated revenues and expenses exceeding past performance, the necessity for the lender to understand all the assumptions on how these revenues will be generated is paramount to loan approval.

3. Working Capital

Working capital is defined as the excess of current assets over current liabilities.

Current assets are the most liquid and most easily convertible to cash, of all assets. Current liabilities are obligations due within one year. Therefore, working capital measures what is available to pay a company's current debts. It also represents the cushion or margin of protection a company can give their short term creditors.

Working capital is essential for a company to meet its continuous operational needs. Its adequacy influences the firm's ability to meet its trade and short-term debt obligations, as well as to remain financially viable.

4. Collateral

To the extent that worthwhile assets are available, adequate collateral is required as security on all SBA loans. However, SBA will generally not decline a loan where inadequacy of collateral is the only unfavorable factor.

Collateral can consist of both assets which are usable in the business and personal assets which remain outside the business. Borrowers can assume that all assets financed with borrowed funds will collateralize the loan. Depending upon how much equity was contributed towards the acquisition of these assets, the lender also is likely to require other business assets as collateral.

For all SBA loans, personal guarantees are required of every 20 percent or greater owner, plus others individuals who hold key management positions. Whether or not a guarantee will be secured by personal assets is based on the value of the assets already pledged and the value of the assets personally owned compared to the amount borrowed. In the event real estate is to be used as collateral, borrowers should be aware that banks and other regulated lenders are now required by law to obtain third-party valuation on real estate related transactions of $50,000 or more.

Certified appraisals are required for loans of $100,000 or more. SBA may require professional appraisals of both business and personal assets, plus any necessary survey, and/or feasibility study.

Owner-occupied residences generally become collateral when:

1) The lender requires the residence as collateral;

2) The equity in the residence is substantial and other credit factors are weak;

3) Such collateral is necessary to assure that the principal(s) remain committed to the success of the
venture for which the loan is being made;

4) The applicant operates the business out of the residence or other buildings located on the same
parcel of land.

5. Resource Management

The ability of individuals to manage the resources of their business, sometimes referred to as "character," is a prime consideration when determining whether or not a loan will be made. Managerial capacity is an important factor involving education, experience and motivation. A proven positive ability to manage resources is also a large consideration.

Mathematical calculations on the historical and projected financial statements form ratios which provide insight into how resources have been managed in the past. It is important to understand that no single ratio provides all this insight, but the use of several ratios in conjunction with one another can provides an overall picture of management performance. Some key ratios all lenders review are: debt to worth, working capital, the rate at which income is received after it is earned, the rate at which debt is paid after becoming due, and the rate at which the service or product moves from the business to the customer.

A realistic business valuation requires more then merely looking at last year's financial statement; it requires a thorough analysis of several years of the business operation and an opinion about the future outlook of the industry, the economy, and how the subject company will compete.

Most people believe that a business should be sold for Fair Market Value. The term Fair Market Value is defined by the IRS at Rev. Ruling 59-60 as follows:

"the price at which the property would change hands between a willing buyer and willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts."

There are a number of different methods to determine a fair and equitable price for the sale of the business. The following lists a few methods to determine the price:

  • Capitalized Earning Approach — This method refers to the return on the investment that is expected by an investor.
  • Excess Earning Method — This method is similar to the capitalized earning method, except that it splits off return on assets from other earnings.
  • Cash Flow Method — This method is usually used when attempting to determine how much of a loan the cash flow of the business will support. The adjusted cash flow is used as a benchmark to measure the firm's ability to service debt.
  • Tangible Assets ( Balance Sheet) Method — This method values the business by the tangible assets.
  • Value of Specific Intangible Assets Method — This method is based upon the buyer's buying a wanted intangible asset versus creating it. This method also takes into consideration valuing the goodwill of the business.

In order to determine how much seed money you will need, you must estimate the costs of your business for at least the first several months. Every business is different, and has its own specific cash needs at different stages of development, so there is no universal method for estimating your startup costs. Some businesses can be started on a shoestring budget, while others may require considerable investment in inventory or equipment. It is vitally important to know that you will have enough money to launch your business venture.

To determine your startup costs, you must identify all the expenses that your business will incur during its startup phase. Some of these expenses will be one-time costs such as the fee for incorporating your business or price of a sign for your building. Some will be ongoing, such as the cost of utilities, inventory, insurance, etc.

While identifying these costs, decide whether they are essential or optional. A realistic startup budget should only include those things that are necessary to start that business. These essential expenses can then be divided into two separate categories: fixed and variable. Fixed expenses include rent, utilities, administrative costs, and insurance costs. Variable expenses include inventory, shipping and packaging costs, sales commissions, and other costs associated with the direct sale of a product or service.

The most effective way to calculate your startup costs is to use a worksheet that lists all the various categories of costs (both one-time and ongoing) that you will need to estimate prior to starting your business. The following tool will assist you in performing that task:

Startup Cost Estimate Calculator

Employer Identification Number (EIN)

With the exception of sole proprietors, most business types must apply for an EIN regardless of whether they have employees. Visit the IRS site to find out if you need an EIN, and if so, whether you are eligible to apply through the IRS' online application.

Licenses and Permits

Most businesses do not require a federal license or permit. However, if you are engaged in one of the following activities, you should contact the responsible federal agency to determine the requirements for doing business:

For more compliance information, visit

Federal registration of intellectual property, including patents, trademarks, trade names, and copyrights, provide business owners with exclusive use of intellectual property in the U.S. as well as in a large number of foreign countries.

Before seeking financial assistance, ask yourself the following:

  • Do you need more capital or can you manage existing cash flow more effectively? 
  • How do you define your need? Do you need money to expand or as a cushion against risk? 
    How urgent is your need? You can obtain the best terms when you anticipate your needs rather than looking for  money under pressure. 
  • How great are your risks? All businesses carry risks, and the degree of risk will affect cost and available financing alternatives. 
  •  In what state of development is the business? Needs are most critical during transitional stages. 
  •  For what purposes will the capital be used? Any lender will require that capital be requested for very specific needs. 
  •  What is the state of your industry? Depressed, stable, or growth conditions require different approaches to money needs and sources. Businesses that prosper while others are in decline will often receive better funding terms.
  •  Is your business seasonal or cyclical? Seasonal needs for financing generally are short term. Loans advanced for cyclical industries such as construction are designed to support a business through depressed periods. 
  • How strong is your management team? Management is the most important element assessed by money sources. 
  •  Perhaps most importantly, how does your need for financing mesh with your business plan? If you don't have a business plan, make writing one your first priority. All capital sources will want to see your business plan for the start-up and growth of your business.

Not All Money Is the Same
There are two types of financing: equity and debt financing. When looking for money, you must consider your company's debt-to-equity ratio - the relation between dollars you've borrowed and dollars you've invested in your business. The more money owners have invested in their business, the easier it is to attract financing.

If your firm has a high ratio of equity to debt, you should probably seek debt financing. However, if your company has a high proportion of debt to equity, experts advise that you should increase your ownership capital (equity investment) for additional funds. That way you won't be over-leveraged to the point of jeopardizing your company's survival.

Equity Financing
Most small or growth-stage businesses use limited equity financing. As with debt financing, additional equity often comes from non-professional investors such as friends, relatives, employees, customers, or industry colleagues. However, the most common source of professional equity funding comes from venture capitalists. These are institutional risk takers and may be groups of wealthy individuals, government-assisted sources, or major financial institutions. Most specialize in one or a few closely related industries. The high-tech industry of California's Silicon Valley is a well-known example of capitalist investing.

Venture capitalists are often seen as deep-pocketed financial gurus looking for start-ups in which to invest their money, but they most often prefer three-to-five-year old companies with the potential to become major regional or national concerns and return higher-than-average profits to their shareholders. Venture capitalists may scrutinize thousands of potential investments annually, but only invest in a handful. The possibility of a public stock offering is critical to venture capitalists. Quality management, a competitive or innovative advantage, and industry growth are also major concerns.

Different venture capitalists have different approaches to management of the business in which they invest. They generally prefer to influence a business passively, but will react when a business does not perform as expected and may insist on changes in management or strategy. Relinquishing some of the decision-making and some of the potential for profits are the main disadvantages of equity financing.

Debt Financing 
There are many sources for debt financing: banks, savings and loans, commercial finance companies, and the U.S. Small Business Administration (SBA) are the most common. State and local governments have developed many programs in recent years to encourage the growth of small businesses in recognition of their positive effects on the economy. Family members, friends, and former associates are all potential sources, especially when capital requirements are smaller.

Traditionally, banks have been the major source of small business funding. Their principal role has been as a short-term lender offering demand loans, seasonal lines of credit, and single-purpose loans for machinery and equipment. Banks generally have been reluctant to offer long-term loans to small firms. The SBA guaranteed lending program encourages banks and non-bank lenders to make long-term loans to small firms by reducing their risk and leveraging the funds they have available. The SBA's programs have been an integral part of the success stories of thousands of firms nationally.

In addition to equity considerations, lenders commonly require the borrower's personal guarantees in case of default. This ensures that the borrower has a sufficient personal interest at stake to give paramount attention to the business. For most borrowers this is a burden, but also a necessity

Buying a Franchise

An important step in the small business startup process is deciding whether or not to go into business at all. Each year, thousands of potential entrepreneurs are faced with this difficult decision; because of the risk and work involved in starting a new business, many new entrepreneurs choose franchising as an alternative to starting a new, independent business from scratch.

One of the biggest mistakes you can make is to hurry into business, so it's important to understand your reasons for going into business, and determine if owning a business is right for you.

If you are concerned about the risk involved in a new independent business venture, then franchising may be the best business option for you. But remember that hard work, dedication, and sacrifice are essential to the success of any business venture, including franchising.

What is Franchising?

A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group wishing to use that identification in a business. The franchise governs the method of conducting business between the two parties. Generally, a franchisee sells goods or services supplied by the franchiser or that meet the franchiser's quality standards.

Franchising is based on mutual trust between the franchiser and franchisee. The franchiser provides the business expertise (marketing plans, management guidance, financing assistance, site location, training, etc.) that otherwise would not be available to the franchisee. The franchisee brings the entrepreneurial spirit and drive necessary to make the franchise a success.

There are primarily two forms of franchising:

  • Product/trade name franchising and
  • Business format franchising.

In the simplest form, a franchiser owns the right to the name or trademark and sells that right to a franchisee. This is known as product/trade name franchising. The more complex form, business format franchising, involves a broader ongoing relationship between the two parties. Business format franchises often provide a full range of services, including site selection, training, product supply, marketing plans, and even assistance in obtaining financing.

To learn more about:

  • The advantages and disadvantages of franchising
  • The franchiser's responsibilities
  • What is contained in a franchise packet
  • Understanding the franchise contract



For additional information:

Successful meetings use structure. Procedures and structure help groups perform significantly better in meetings. Meeting structures are the solid foundation upon which effective meetings are built. Below is a list of some of the important structures that make a successful meeting:

  • A regular time for the meeting is established, or meetings are scheduled for a period of time. For example, meetings for a given month, quarter, or year are scheduled at one time.
  • The meeting leader is prepared.
  • Desired outcomes are written.
  • Important inputs to the meeting are prepared and brought to the meeting.
  • Meeting recorder(s) is selected.
  • The meeting format is developed.
  • The meeting agenda is prepared and available ahead of time and is reviewed and modified as needed before the meeting begins.
  • Planned participation is used within the first 15 minutes.
  • Meeting minutes are recorded.
  • The meeting is critiqued for continuous improvement.

Meeting format elements

Successful meetings have a format. Knowing what will be happening in the meeting creates a sense of comfort. A format that is the same for every meeting allows the group to quickly take care of critical, mundane business, leaving the majority of the time to work on important agenda items.

Part 1: Meeting Startup

  • Be sure meeting inputs are prepared and at the meeting
  • Introduce any guests or new members to the group
  • Verify that a quorum exists
  • Review the group's goals and progress on the goals
  • Agree on the meeting's desired outcomes
  • Finalize the meeting agenda, including asking for any new agenda items
  • Prioritize the agenda items with items requiring the most participation coming first; estimate times for each agenda item

Part 2: Meeting Body

  • Proceed through the prioritized list of agenda items
  • Summarize agreed upon action items and decisions as they are made
  • Reports
  • Announcements

Part 3: Meeting Wrap-up

  • Summarize all action items and decisions
  • Plan next meeting; desired outcomes, agenda items, and any meeting inputs
  • Identify roles and responsibilities for next meeting; meeting leader, recorder, etc.
  • Critique the meeting and overall teamwork

Part 4: Follow-up and Preparation for Next Meeting

  • Prepare and distribute minutes of the meeting

Sample Meeting Plan

The following information is a complete example of a meeting plan that incorporates the points discussed above:

1. Determine Roles and Goals for the meeting

Leader: Jane
Recorder: Lisa
Timekeeper: John

Desired Outcomes: problem statement
Information that is needed for the meeting: a brief summary
Who needs to come/How they will help reach goals: list of attendees

2. Create Meeting Outline and Assign Allotted Times

A. Verify a quorum exists, 1 minute 
B. Introduce guests, 1 minute 
C. Review minutes and follow-up items from last meeting, 4 minutes 
D. Address the problem statement, 25 minutes 
E. Reports, 2 minutes 
F. Draft next meetings agenda, 5 minutes 
G. Summarize decisions and assignments, 1 minute 
H. Critique the meeting, 4 minutes

3. Prepare a Preliminary Agenda

Date of Meeting: March, 4 2007
Start Time: 10:30 am
Place of Meeting: Room 22
End Time: 11:15
Total Time: 43
Actual Time:

Once you have a written business plan, you are now ready to approach the money markets to try to finance your business.

Developing your loan proposal

Your loan proposal must answer the following questions:

  • Who are you?
  • How much do you need?
  • How are you going to pay it back?
  • What happens if you can't pay it back?

Elements of your loan proposal

Generally, the loan proposal is comprised of the following elements:

  • Summary: Comes first; written last.
    This should be clear, concise, accurate and inviting. You want to summarize how the proposed loan will be used, how it will be repaid and how it will benefit your business. Remember, that you are competing with many others, so you'll also want to point out some of the distinguishing features of your business.
  • Top management profiles:
    The key issue here is who are you? Be prepared to come under close scrutiny. You will need resumes as well as a summary of experience, qualifications and credentials for all owners and key members of your management team.
  • Business description:
    You don't need to repeat all of the information contained in your business plan, but you do need to present a solid description of your business. Include a brief overview of the history of your business, plus a summary of current activities. Make sure you clearly demonstrate that you understand your markets and industry (current trends and risks). Include literature showing your products or services. It is also helpful to include letters from suppliers, customers and other business references.
  • Projections:
    Include projected income statements and cash flow statements for two to three years. Your assumptions should be clearly stated and realistic. Generally, you don't need to show "best case" and "worst case" unless the banker asks you to do so. But do be prepared to answer questions (in quantifiable terms) about what happens if some of your assumptions don't come true. For example, if you anticipate obtaining a major new contract or customer as a result of newly expanded capacity, can you estimate the impact on your income statement if that customer decides to take her business elsewhere?
  • Financial Statements:
    The loan package must include both business and personal financial statements. Make sure that you fully understand the "story" that your financial statements tell. Be assured that your banker will fully analyze your historical financial statements and calculate all the ratios. So, prepare in advance and point out any significant trends in an introductory paragraph.
  • Purpose of the loan:
    Present a detailed statement of how you will use the loan proceeds.. Don't forget to include the proceeds of the loan in your cash flow projections (and the interest in your projected income statement).
  • Amount:
    Remember, that you are offering the bank a deal that will make them money -- you are not asking for an "allowance". The attitude you should take is to ask, "how much money do you need, and how much will they lend?" and not, "will they lend it?"
  • Repayment plans:
    You will have to make some assumptions about the terms of the loan in your proposal. (Obviously, this is necessary to prepare the initial financial projections.) In the first package, you will propose the terms that you want, but ultimately this will be a point that will be negotiated with the bank. The bank will consider a number of factors as they assess the overall risk of the loan and this will impact the repayment terms they are willing to give you. 

Selecting the bank

You may already have a relationship with a bank, and this is generally the logical first choice for borrowing money. But whether this is your first loan, or you are borrowing additional money, you should consider several points before selecting the bank.

Although you may need money, you should be in the driver's seat when it comes to choosing the bankers or partners you want to deal with. Make sure the bank is sincerely interested in your business and will provide you with the services you need. You should also look for a banker with whom you feel you can develop a good ongoing relationship and that has experience with similar businesses. Keep in mind the value of your business to the community and what its future deposits could mean for the bank.

Key questions to ask bankers include the following:

  • Do they have an industry specialty related to yours?
  • What is the average size of their borrowers?
  • What are their professional backgrounds, especially in terms of whether they are commercial or consumer lenders?
  • How long have they been in these positions?

Do they have the level of lending authority you need

Whether you patronize a large commercial bank or a small community bank will depend on your needs. Major banks tend to offer a wider range of services and locations, which may be important if have the need for a variety of financial products and services. Community banks, on the other hand, are smaller, meaning that the banker you deal with daily might be able to make your financing decision personally or get it through the bank hierarchy quicker.

Presenting your loan proposal

Okay, now your loan package is prepared and its time to get ready to present your proposal. Before you go to the bank it is a good idea to role play with someone you trust. This is not the sort of presentation that you make every day, and this can help ensure that you are comfortable discussing all the material in your loan package, and have considered all the questions your banker might ask in the initial interview. If you have a question about how to present your loan, now might be a good time to visit the Info Exchange - discussion forum on lending and seek the advice of an expert or another business owner that has been through this before.

Before you approach a bank you should:

  • Have comprehensive written documentation ready.
  • Know your numbers inside and out.
  • Know what collateral you can offer.
  • Be prepared to sell yourself.

Handle the meeting professionally -- make an appointment, show up on time and have a business demeanor throughout the meeting. You should tell a prospective banker what benefit your business brings to the bank in terms of average balances in checking accounts, savings accounts, and present and future financial needs. You should also ask them questions to see if you think they are the right people to handle your account.

After you present your loan proposal, ask the banker what can be expected in terms of a response time, or when they will request additional information. Obviously, the request won't be approved in the initial meeting. But if you've done your homework, you will already have a good idea of whether or not your loan is likely to be approved.

If your loan is approved:

(besides celebrate) make sure that you:
Thoroughly review all loan documents and understand before signing. Consult with your lawyer or accountant if you have any questions.

  • Get documents in on time -- frequently there are a number of documents that cannot be finalized until after the loan is approved and closed. Keep up that good impression the bank has of you by promptly responding to requests for additional information, documents, signatures, etc.
  • Maintain close contact with your loan officer. It is a good idea to give her progress reports -- the bank now has a vested interest in your success and will want to be kept current.
  • Communicate problems. Bankers, don't like surprises, particularly if the news is bad. So, make sure they are one of the first contacted if you encounter any problems.

Once your banker makes a loan to you, he or she has a vested interest in your business success. If you prosper, the bank prospers. If you fail, the loan they approved is not going to be paid.

If your loan is not approved:

  • Don't despair.
  • A "no" today doesn't necessarily mean no forever.
  • Don't take it personally.
  • Be gracious.
  • Ask the banker to explain "why" your loan was not approved.
  • Don't get defensive, seek information so that your next proposal addresses and corrects any deficiencies in the current application

Where to turn for help:

There are a number of resources available to help you prepare your loan proposal, including SBA-affiliated Women's Business Development Centers, Small Business Development Corporations, and Service Corps of Retired Executives (SCORE).

What to do when no one will lend you money:

There may be times when knowing the money markets, as well as preparation, presentation, pluck and persistence just don't seem to work. The key to overcoming this financial obstacle is not to get bitter: get resourceful. Remember there is more than one way to skin a cat.

If you have a viable business idea you should be able to find funding... as long as you have done your homework and developed a written business plan.

Other owners have raised money from friends by making attractive interest rate offers to friends and acquaintances for loans.The secret is to prepare yourself -- before you implement that growth strategy. Your business plan will provide you with a way to look, before you leap.

(Women's Economic Self-Sufficiency Team, Albuquerque, NM, and Charlotte Taylor, Venture Concepts, in association with New Jersey Association of Women Business Owners, Inc., 5/97.)

The U.S. Small Business Administration (SBA) is an independent Agency of the Executive Branch of the Federal Government. It is charged with the responsibility of providing four primary areas of assistance to American Small Business. These are: Advocacy, Management, Procurement, and Financial Assistance. Financial Assistance is delivered primarily through SBA’s Investment programs, Business Loan Programs, Disaster Loan Programs, and Bonding for Contractors.

SBA’s Business Loan Programs

SBA administers three separate, but equally important loan programs. SBA sets the guidelines for the loans while SBA’s partners (Lenders, Community Development Organizations, and Microlending Institutions) make the loans to small businesses. SBA backs those loans with a guaranty that will eliminate some of the risk to the lending partners. The Agency's Loan guaranty requirements and practices can change however as the Government alters its fiscal policy and priorities to meet current economic conditions. Therefore, past policy cannot always be relied upon when seeking assistance in today's market.
Federal appropriations are available to the SBA to provide guarantees on loans structured under the Agency's requirements. With a loan guaranty, the actual funds are provided by independent lenders who receive the guaranty of the Federal Government on a portion of the loan they make to small business.

The loan guaranty which SBA provides transfers the risk of borrower non-payment, up to the amount of the guaranty, from the lender to SBA. Therefore, when a business applies for an SBA Loan, they are actually applying for a commercial loan, structured according to SBA requirements, which receives an SBA guaranty.

In a variation of this concept, community development organizations can get the Government's full backing on their loan to finance a portion of the overall financing needs of an applicant small business.

SBA’s Investment Programs

In 1958 Congress created The Small Business Investment Company (SBIC) program. SBICs, licensed by the Small Business Administration, are privately owned and managed investment firms. They are participants in a vital partnership between government and the private sector economy. With the private capital they raise and with funds borrowed at favorable rates through SBA, SBICs provide financing in the form of debt or equity to small businesses.

SBA’s Bonding Programs

The Surety Bond Guarantee (SBG) Program was developed to provide small and minority contractors with contracting opportunities for which they would not otherwise bid. The U.S. Small Business Administration (SBA) can guarantee bonds for contracts up to $2 million, covering bid, performance and payment bonds for small and emerging contractors who cannot obtain surety bonds through regular commercial channels.

SBA's guarantee gives sureties an incentive to provide bonding for eligible contractors, and thereby strengthens a contractor's ability to obtain bonding and greater access to contracting opportunities. A surety guarantee, an agreement between a surety and the SBA, provides that SBA will assume a predetermined percentage of loss in the event the contractor should breach the terms of the contract

Every business is different and has its own specific cash needs at different stages of development; therefore there is no generic method for estimating your startup costs. Some businesses can be started on a shoestring budget, while others may require considerable investment in inventory or equipment. It is vital to know whether you will have enough money to launch your business venture.

To determine your startup costs, you must identify all the expenses your business will incur during its startup phase. Some of these expenses will be one-time costs, such as the fee for incorporating your business and the price of a sign for your building. Some expenses will be ongoing, such as the cost of utilities, inventory, insurance, etc.

While identifying these costs, decide whether they are essential or optional. A realistic startup budget should only include those elements that are necessary to start the business. These essential expenses can then be divided into two separate categories: fixed (overhead) expenses and variable (related to business sales) expenses. Fixed expenses will include figures like the monthly rent, utilities, and administrative and insurance costs. Variable expenses will include inventory, shipping and packaging costs, sales commissions, and other costs associated with the direct sale of a product or service.

The most effective way to calculate your startup costs is to use a worksheet that lists the various categories of costs (both one-time and ongoing) that you will need to estimate prior to starting your business. The following tools will assist you in performing that task:

While business licensing requirements vary from state to state, some of the more common types are listed below.

Business Licenses

A state business license is the main document required for tax purposes and conducting other basic business functions. Many states have established small business assistance agencies to help small businesses comply with state requirements.

Occupations and Professions

State licenses are frequently required for occupations as varied as building contractors, physicians, appraisers, accountants, barbers, real estate agents, auctioneers, private investigators, private security guards, funeral directors, bill collectors, and cosmetologists. Since you can't always guess which occupations and professions are licensed by your state, you should always check with your state licensing authorities.

Licenses Based on Products Sold

Some state licensing requirements are based on the product sold. For example, most states require special licenses to sell liquor, lottery tickets, gasoline, or firearms. Contact your state licensing authorities to determine the licensing requirements of your business.

Tax Registration

If the state in which you operate has a state income tax, you'll have to register and obtain an employer identification number from your state Department of Revenue or Treasury Department. If you're engaging in retail sales, you will need to obtain a sales tax license.

Trade Name Registration

If your business will only be operated in your local community, registering your company name with the state may be sufficient.

Employer Registrations

If you have any employees, you'll probably be required to make unemployment insurance contributions. For more information, contact your state Department of Revenue or Department of Labor.