Congratulations! Business is booming and you’re bursting at the seams – now what? The key to expansion success is to develop a new and improved business plan that helps you control your growth. If you intend to seek out a formal business loan, your banker will expect to see a formalized plan that demonstrates your ability to take on additional debt.
The Small Business Administration (SBA) has several loan products offered through traditional bankers that are designed to facilitate business expansion. Banks like these products because the government offers a guarantee that is enticing to the lending agency; this works in your favor, but doesn’t mean you wouldn’t ultimately be responsible for repaying the loan should you default.
Your personal and business credit scores are also important pieces of data that demonstrate your ability to handle debt and the bank will look at those scores. They will also expect you to have “skin in the game”, your own money or that of your friends and family, typically 20-50% of the total project. Finally, the bank will ask for collateral. For first-time borrowers, that usually will mean establishing a lien against your home; subsequent business loans will take liens against the business as well.
The bank will look at the financial projections you prepare as part of your business plan. But there are other ways to know in advance whether or not your financial picture will assure the lender that you’re a sound risk. Provided your financial records are current, you can apply three specific ratios to your present situation to determine your “bankability”; Current, Quick, and Debt-to-Worth.
The Financial Literacy course, Profit Mastery, offered through our center three times a year, describes these ratios as follows:
Falling outside of these ratio criteria doesn’t necessarily mean an automatic “no”, but a weak financial position will definitely impact the size of the loan and its corresponding interest rate. Discovering early on that you have a weak financial position provides you with an opportunity to stage an intervention and do damage control before approaching a lender.
There’s been a lot of buzz in recent years about crowdfunding. Sites such as Kickstarter and Indigogo have created overnight success stories. Or have they? Money gleaned from a successful crowdfunding campaign is anything but fast or cheap. Successful ventures may have experienced several failures before finally hitting their goal. There are fees and costs that bite into the booty, and simply preparing a campaign can take several months.
Some rules of thumb:
Our consultants are all skilled in helping you visualize your project or expansion. You are encouraged to schedule an appointment, 320-308-4842, to discuss your goals and develop your plan.
Funded in part through a Cooperative Agreement with the U.S. Small Business Administration, Minnesota Department of Employment and Economic Development and regional support partners. All opinions, conclusions or recommendations expressed are those of the author(s) and do not necessarily reflect the program sponsors. Programs are open to the public on a nondiscriminatory basis. Reasonable accommodations for persons with disabilities will be made if requested at least two weeks in advance. Contact Central Region SBDC at 320-308-4842.