The steps you need to get you accepted for that bank loan…
When you ask for a small business loan, you have to convince the lender that you will be able to repay that loan.
This is done by preparing realistic financial projections about your cash flow patterns. The cash flows would indicate how and when you would be able to repay the loan.
Below are the 4 things you need to get your loan:
1. Income & Expenditure Statement
First come estimates of your Income and Expenditure.
- How do you estimate your income to grow from month to month?
- What direct costs would be incurred while earning that income?
- What “fixed” establishment costs, such as rent, staff salaries, council taxes, interest and depreciation of plant & machinery would have to be incurred month after month?
- After how many months would your income begin to exceed the expenses – the total of both direct costs and fixed establishment?
- What would be the net losses or net profits each month?
You start the estimating process by going into the field and collecting needed information. Based on the information, and also the kind of marketing setup you plan to organize, you estimate the income and expenditure levels.
2. Working Capital Statement
Next come the Working Capital estimates.
- How much cash would you need to hold to meet day-to-day expenses?
- If yours is a manufacturing or retail outlet business, you would need to hold inventories. What level of inventories would have to be maintained?
- If you sell on credit, you would typically have unpaid customer bills at all times. How much would these be?
- You would also usually have to make advance payments and deposits. What would these total to?
In the case of manufacturing businesses, the inventories could be raw materials, semi-finished products on the shop floor or unsold finished products in the warehouse. The last two would have to be valued to identify the cash blocked up in them.
You would notice that you would have to block up cash for all the above. For example, cash payouts would be involved in all types of inventories and unpaid bills would have been cash if the credit had not been extended. Part of this could be financed by the credit that you yourself could get, as in the case of materials inventory purchases.
There are formal methods that make it easier to compute working capital requirements. You can take the help of a professional accountant to help you gather the needed information and prepare a working capital estimate.
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3. Cash Flow Statement
The Cash Flow statement reflects the cash impact of all the business transactions. You start with the opening balance of cash (and bank) at the beginning of the period. To this you add any cash receipts. Cash receipts could be: cash income, collections from credit customers, cash you bring in as business capital or loans you receive from different sources.
From the total of opening cash and cash receipts, you deduct cash payments to arrive at the closing cash (and bank) balance at the end of the period. Cash payments could be: business expenses (excluding non-cash expenditure like depreciation), cash purchases (of assets like machinery or consumables like raw materials), payments to credit suppliers, your drawings from the business or repayments of loans.
The Cash Flow statement is typically prepared in a standard format by showing only the net impact of receipts and payments for items like income and expenditure and working capital. You would most likely need the help of a professional accountant to prepare it.
4. Balance Sheet
Finally come the Balance Sheets.
- A Balance Sheet is a Statement of Affairs of the business. It is drawn up As On some particular date.
- The Statement of Affairs shows the Assets of the Business, its Liabilities and Owner’s’ Equity. Owners’ Equity is the difference between Assets and Liabilities. If Assets exceed Liabilities, Equity is positive. Otherwise, it is nil or negative.
- The various assets you purchase for the business are shown in the Balance Sheet at cost (less depreciation charged to Income & Expenditure). Your borrowings and supplier credit are shown as liabilities. The amount you brought in as capital (plus any profits not withdrawn from the business) is shown as the equity. Business losses and any cash withdrawals by you from the business are shown as deductions from the equity.
- Here again, you might need the help of an accountant. Balance Sheets have standard formats. The Income & Expenditure, Working Capital and Cash Flow statements affect the Balance Sheet. These could become quite complex and an accountant is the best person to handle it.
To make the financial projections realistic, you have to:
- Collect business and technological information from the field.
- Estimate projected values on some specific basis, such as sales estimates from experienced distributors and cost estimates that are derived from production estimates.
Once such realistic estimates have been made, you would find it quite easy to make your case for a small business loan.