How to secure a line of credit for your business

Black Enterprise, Jan, 1994 by Carolyn M. Brown

In addition to the business' tax returns, the most crucial financial records are the balance sheet (listing a company's assets and liabilities), income statement (showing profit and loss) and cash-flow projections (charting the movement of funds in and out of your business). The loan officer will use this information to determine the net worth of the company, to examine how funds are used and to analyze trends in sales or revenues.

What does a banker want to see for existing businesses? According to Nelson, the basics consist of three years worth of balance sheets and income/expense statements, a projected balance for the upcoming fiscal year and a month-to-month projected cash-flow analysis for one year. Also, the banker will want to see estimated operating statements for three years.

For start-ups, it's a lot more tricky. The entrepreneur must produce projected operating and cash-flow statements for three years. He or she also needs an opening balance sheet, a break-even analysis (which shows when income equals outgo), capital equipment list (cost or value), appraisals on real estate and equipment and personal financial statements form the last three years.

Such rigors mean that no business owner, whether novice or veteran, can do a half-baked job of financial reporting. But many do. Citing high costs, they try to shortchange on the paperwork, says Robyn Elliott, a Culver City, Calif., CPA.

But guess what? Bankers spend a great deal of time doing their own in-house number-crunching and analysis of a borrower's financial statements. If you're shaky in this area, take a crash course at a local college, or attend seminars sponsored by the AMA (American Management Association) or SCORE (Service Corps of Retired Executives Association). A general rule: It helps if you show statements prepared by an accounting firm or a CPA.

SURVIVING THE INQUISITION

Bankers ask five key questions when a loan application hits their desks. How you answer them can make or break your request:

1. How much money do you want? Never ask how much the banker is willing to lend. If you need to borrow $50,000, then hold firm to that request - and don't ask for more. Present the most precise calculations you can assemble to explain why you need that amount.

2. How will the loan help your business? The banker wants to know the loan will result in something positive, say, additional cash flow, higher sales or cost reductions - not pay you a higher salary. Be as specific as possible.

3. How will you pay the money back? The primary sources of repayment are business proceeds, conversion of assets or cash flow. You must prove the business has lasting earning power, which is reflected by a year-long monthly cash-flow statements and quarterly projections for the term of the loan.

Nelson tells business owners to go to the marketing section of the business plan. "I want to know who their customers are, how they're going to reach the market, how competitive they are and how they price their products." Lenders want proof of revenue figures, so they scrutinize projections. "Many owners know exactly what their fixed expenses are, but they have a pie-in-the-sky idea of how much revenue the business can generate."