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Planning Your Financial Needs

A surprising number of entrepreneurs wait until the last moment to arrange financing. The fact that an acquirer needs money urgently makes no difference whatsoever to financial institutions or investors. What they do care about is the credibility of the business plan and the character and commitment of the people applying.

The length of time required to evaluate and approve a loan varies from source to source. In general, this period is shorter if the risk is lower or if an established relationship exists with the borrower. Government agencies, such as the Federal Small Business Administration, tend to take longer than commercial lenders, but their terms are generally more attractive and well worth the wait.

Planning ahead will give you the luxury of meeting and evaluating a broad range of lenders to find out if you fit their criteria and, if you do, to choose among their offers.

An introduction from a VR professional business intermediary that the lender is sure to respect is the fastest way to many financing options. Investors often receive thousands of business plans over the course of their careers, but meet with fewer than 20 percent. The surest way to count you among the elite is to get a personal introduction from your VR intermediary.

Having the right management team in place is crucial. Lenders like to work with individuals or companies whose management has experience in the industry. You won’t get very far with lenders if you haven’t made a serious financial commitment to the business. Are you willing to risk most or all of your net worth to see your venture through? Are you willing to take a pay cut from your previous salary until it becomes profitable? You had better be; lenders expect you to share in the pain for the promised gain.

Capital Requirements: How much do I need, when will I need it and how will I use it. 

Lenders will want you to have specific, detailed answers to show your credibility for your capital requirements

In calculating how much you need, be totally honest in all your projections, whether they are for your expenses, your revenue or your market share.

To get the size of the loan you are requesting right:

  • Evaluate the assumptions used to make the projections and make sure they are realistic.
  • Find the right time horizon. You obviously don’t want to have to keep going back to lenders every few months. On the other hand, you shouldn’t borrow so much money from venture capitalists that you end up with a negligible stake in the company.
  • Do not add excessive “cushions” of cash to your calculation of what you actually will need.
  • Make sure your projections conform to the history of the company and that they take into account current market conditions. Show your lenders where the company has been and where it expects to go.

Identify Events That Could Affect Capital Needs

You need to identify what circumstances might affect your need for capital, and how to cope with changed circumstances. Causes for change in capital requirements include higher or lower sales than forecast, higher or lower costs and faster or slower payments.

A “cushion” is a reserve of cash or a commitment by a lender to provide cash in case you need it. It’s easier to get a cushion from a lender if you have collateral or from an equity investor if you have a history of growth and of making reasonably accurate forecasts.

Be prepared to tell a lender what you’ll do in response to a sudden shrinkage in demand, to cost overruns, to competitive pressures and to other events that could affect cash flow. Honesty is the intangible that lenders value most.

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