bank,finance,startup,business

Finance for Startups – Let’s Keep It Simple!

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Percent of Failed Businesses Year 1 at 25%, Year 2 at 36%, and Year 3 at 44% – StatisticBrain.com

You get up, put on your best business suit and polish your shoes. You even attempt tidying up your hair and you carefully place all your documents in a briefcase. You take one last look in the mirror and mouth “hot stuff!” as you wink at your reflection and head out the door. No, you’re not heading out to a hot date or meeting the future Mrs. So-and-So.

You’re heading to the bank because you had a brilliant business idea in the shower last week and any bank who doesn’t want a piece of it, will miss out big time. You practice your carefully rehearsed script as you drive to the bank. You know what you’re going to say and how you’re going to say it. You get there and expect to be shown into a luxurious business office that houses a carefully manicured business manager to discuss this project. Instead, you sit and wait in the queue with the rest of the clients who also didn’t make an appointment.

What to Expect When You Go to the Bank for a Startup Loan

After sitting in the queue for the good part of an hour, you’re finally shown to the business banker’s office. The business banker looks like a smoker’s cough and although the office is neat, everything is chipboard and plastic to save costs and cut corners. Just another business, you realize. The banker turns his tired gaze to you and asks what he can help you with. That carefully rehearsed speech is out the door and you sit there fumbling for words like a fish out of water.

He slowly takes a sheet of paper from a nearby file, and you notice that it’s a checklist. He starts asking you a few questions about the industry and then runs through the requirements. A business plan, it turns out, forms the backbone of this application. You didn’t know that. Your company profile and projection just won’t cut it. He doesn’t want to hang on to your documents or look through what you have in the meantime. He will have forgotten what it was about by the time the rest of the documents get to him, he mumbles as he escorts you out the door.

Before the Anger Wells Up

Yes, okay, you worked on your documents a whole darn week before you went to the bank. You even missed the latest eposide of Hawaii 5-0 to get all your documents in place, only to find out that they’re pretty basic. He refers you to an accountant and a business plan writer, he also gives you a checklist to work through. He emphasizes that you only come back when you have all those things. No, they won’t consider it without those documents. No, the manager doesn’t have any say. Oh, and did he mention that he needs collateral and a deposit? No, they’re not the same.

Before dropping your paperwork in the trash and giving up on your idea, you need to decide how much you want this business to succeed. Suck it up, Buttercup and get to work. Even if you manage to self-finance your business, work through the checklist anyway. As much as this is a passionate decision, you will need to use your brain as well.

So What’s in the Checklist?

For a new business to start off with the least amount of risk, it’s important to make sure all the basics are in place, whether you apply for finance or not:

  • Lease agreement to ensure your business will have a premises. If you’re applying for finance, this only needs to be signed after the finance has been approved.
  • Staff appointments should your business require it, such as factory workers, seamstresses, or whatever is required.
  • A comprehensive business plan.
  • A feasibility study of it’s a high-risk industry or a niche business.
  • A list of asset requirements and invoices.
  • A list of stock requirements and invoices.
  • Furniture and fitting requirements and quotations.
  • Licenses or certifications required for business.
  • Franchise specific documents where applicable.
  • A cash flow forecast for 12 to 24 months, with assumptions.
  • Resumes of all principle members.
  • Information about key individuals.
  • Information on the collateral offered.
  • Details of the own contribution by the owner/s.
  • Any other document pertinent to the business or industry.

Why So Many Documents?

It is the duty of the bank to ensure that they mitigate risk. This means that the lending will need to take place with as much information as possible, to ensure the wellbeing of their investment. It is also crucial for them to protect the assets of the owner as far as possible. With the regulations pulling in tighter, a lot of the risk is carried by the bank even when there is security in place. This is because they suffer reputational damage when they need to call up the security.

The high failure rate of businesses is also something of concern to banks. Proper research needs to be done by the client to ensure they’re not buying a hole in their pocket. Although the bank does its own research, it is the client’s duty to follow due diligence. Each piece of paper that aids in research provides the bank and the owner with the assurance that they’ve covered all angles. When you start crunching the numbers and have a look at the number of business failures, the need for proper research is evident.

The guys over at StatisticBrain.com have done a lot of research to pinpoint the exact number of years businesses should operate for before being in the clear, and the sad truth is that longevity is not a guarantee of success. Businesses fail well into the tenth year of operation.

The different types of industries play a big role in the success of a business, and those deemed as high-risk will need a little more paperwork, collateral and own contribution before the bank will put their money down.

failure, business, industry

Failure By Industry © StatisticBrain.com

Can I Draw Up My Own Business Plan?

The answer is both yes and no. It depends whether you have a fair amount of business acumen and understand the terminology they wish you to discuss the business plan. Bear in mind that the bigger the ask for finance, the more involved the business plan should be. The business plan allows the bank or any other investor to have proper insight into the business. It also provides them with a clear picture of whether the business owners are aware of what they’re getting themselves into. There are many templates on the web that guide business owners, allowing them to draw up their own business plans.

Many business owners find this process daunting and difficult, as many of the terms or phrases may seem repetitive or ambiguous. This is why it’s a good idea to have the business plan drawn up by someone who has experience. Keep an eye out for businesses who offer a personal or Skype interview or who display a genuine interest in your business. Asking a lot of questions is a good thing. You want the business plan writer to have as much information as possible.

Those who pull a business plan out of thin air rob you of your finance opportunity. Rather spend the money wisely and get it done properly. If you think the bank won’t notice that the actual information is based on a different demographic, think again. The banks go through the business plans with a magnifying glass. Their reputation is on the line, after all.

Dust off those research skills and put on that thinking cap. Knuckle down and do the work. Your future self will thank you for it.

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