Byron Sheardown wasn’t about to let tough economic times in late 2008 and early 2009 deter him from his goal of purchasing International Web Express Inc., a Coquitlam, B.C. firm that prints multicultural newspapers in 17 languages. He buckled down and, applying much of the knowledge gained over his more than 20 year career as an entrepreneur running various small businesses, successfully applied for his first business loan, which helped to seal the acquisition in March, 2009.
“A key thing I did to get that loan was to hire a former chief executive officer – who understood my goals and the business I wanted to acquire – to create a business plan for the bank. This fellow helped me do the important number-crunching I needed to provide believable projections about sales, cash flow, and the like,” Mr. Sheardown explains.
Today, the 42-year-old entrepreneur and business owner retains the services of Bruce Hurst, a partner with Reid Hurst Nagy Inc., a certified general accounting firm in Richmond, B.C., to assist when he applies for new loans to support his company’s growth.
“You want to impress your potential loan institution. In order to do that, I would suggest as a starting point that you have a very good business plan that covers all the bases with respect to finance, marketing and product development,” stresses Mr. Hurst.
“A business plan brings your idea to life on paper, so that plan is worth the time to get it right,” asserts Cathy Pin, vice-president of commercial banking at BMO Bank of Montreal in Toronto. It should be informative. For instance, “bankers are looking for an understanding of what kind of equity is invested in the business. Building equity is about having enough capital to absorb a loss for any kind of change. It also demonstrates your commitment to the business,” she emphasizes.
Alec Morley, senior vice-president of small business banking at TD Financial Group in Toronto, also stresses the weight that bankers place on an entrepreneur’s business plan. “You’re going to help build credibility if you’re able to demonstrate that you’ve got a well-thought-out business plan. That is particularly important for startups,” he says.
One thing to guard against when developing a business plan, especially one to be evaluated by potential financiers, is being overly optimistic. Entrepreneurs are optimists by nature, and may sometimes have a tendency to do things such as forecast immediate sales, rather than face the reality that it can take several months before a cash flow is established for a new business, warns Ms. Pin.
Bankers will red-flag unrealistic expectations, echoes Mr. Morley. For instance, he notes, some startups will show projections that look like “the hockey-stick trend, where things go along at a low level and all of a sudden, they just take off [and]shoot for the moon.
“That’s unrealistic, and people who are starting up companies have to be brutally honest with themselves. Be modest about your projections – and at all costs, avoid being a romantic,” he stresses.
“Cash flow projections are where a lot of startups really sort of drop the ball. Sometimes people have an expectation of profit, but profit doesn’t necessarily translate into cash in the bank. Money is tied up in accounts receivable and inventory and that type of thing. So sometimes the cash isn’t there,” warns Mr. Hurst.
The business plan must also be resilient and flexible, and take into account contingencies. Today, for instance, in an era with so much global uncertainty, loan officers in banks want to see that businesses have accounted for factors such as the potential disruption of a global supply chain, or the impact of dramatic foreign currency fluctuations on expected sales, cash flow and profit margin, Ms. Pin says.
Possessing enough security to act as collateral for a potential loan is another important point to keep in mind, as is the personal credit history of the entrepreneur.
“Your banker will need to see your personal credit bureau network statements, and it’s absolutely critical that you’re open about your credit history,” emphasizes Ms. Pin. “Check with your credit bureau. If there are any inaccuracies, correct them. Be honest with your banker, because if the banker finds [problems]before you do, it erodes trust. A relationship is about trust,” she advises.
“The bank is your friend, so don’t hide things from them,” says Mr. Sheardown, who stresses that his policy is to remain open at all times with institutions he may need to seek financial assistance from – by sharing both his business successes as well as events that haven’t gone as well as initially anticipated.
Another key strategy for startup entrepreneurs is to begin building a relationship with their banker early on.
Mr. Morley says every business owner needs three supporting players: “A good business banker; a good accountant, probably with a tax angle; and a good lawyer to help them with things like contracts and so forth,” he says.
“I think sometimes people are a little bit cautious about going in and talking to the bank. [But]you don’t have to go straight to the question, ‘Will you lend me money?’ Just start the conversation. Say ‘What are some of the things you look for in order to finance my business?’” he suggests.
Mr. Hurst agrees that business owners need to be pro-active.
“The biggest mistake I see in this process is that people have already started the business, and then realize they need loans to buy more inventory or equipment – that type of thing – and go the week before payments are due. A bank would be far more impressed if you do this well in advance, before you’ve actually incurred the legal liability to pay out any monies,” he says.