There’s a lot of work that goes into starting your own business. It begins with a great idea, but how do you turn that idea into a reality? You’ll have to do a lot of research and planning — and you’re also probably going to need money.
1. Take advantage of free local resources. “Jefferson Parish Economic Development Commission (JEDCO) has a great business startup kit, and they will help people for free with business plans, market research and mentorship,” said Holley Haag, Southshore Market President at First Bank and Trust. “Another resource is the Small Business Association (SBA): They offer loans and grants. Louisiana Small Business Development Center (LSBDC) has 10 regional offices in the New Orleans area, and they offer free consulting, training and information resources for people.
2. Put together a strong business plan, then go beyond it. But a strong business plan isn’t going to guarantee loan approval. Debbie Moran, a partner at Hannis T. Bourgeois, LLP, said banks may be hesitant to lend money to a startup. “Unless you have some kind of collateral, like an asset — a CD or a house — or you have somebody with assets co-signing for you, it’s going to be difficult.”
Kevin Laborde is the president of Cash Flow Resources, a private commercial factoring company based in New Orleans. He said there’s other information you can provide, in lieu of — or in addition to — collateral, that can help with your loan application.
“A traditional lender like a bank is going to want to see what you’ve been able to accomplish in the past,” Laborde said. “Income statements for the last couple of years, a balance sheet that shows your assets and liabilities, what do you own and what do you owe on it. If you had a $10,000 debt a year ago but it’s gone now, well, you’ve shown someone that you can pay off a debt. The easiest way to get somebody to buy into a loan request is show them how it will come back,” he said.
The way to demonstrate how the money gets paid back is through your business plan, which should include the location of your business, the product you’ll be selling, how much it will cost to produce that product, how you’re going to sell it and research showing that there is a market for your product.
According to Moran, you should also be able to answer the following questions: “Do I need, for example, $50,000? And if I get that money what am I going to do with it? Is that amount going to hire the first person? What do I anticipate my sales will be this month? Next month? Ten months from now? What are my expenses are going to be?”
3. Have detailed financial statements in hand. A business plan should also include projected financial statements, including a balance sheet, income statements and projected cash flows.
“Before you go to the bank, you should have thought out exactly what you think those [financial statements] are going to look like,” said Moran. “You need to have those in hand when you walk in the bank.”
The more detailed your financial plan, the better.
“Usually we like to see monthly projections for the first 12 months, then another three to five years after that on an annual basis with the assumption of fixed expenses, variable expenses and revenues,” said Haag. “I advise people to make assumptions and be conservative and realistic about revenues.”
4. Be realistic about both goals and expenses. “I see lots of people come in who think they can accomplish X, and they’re probably fortunate if they can do half that,” Laborde said. “They want to convey such optimism about what they’re doing that they forget about realism. I think you need to strike that balance and remember what that lender needs to do on his end, which is get that loan repaid.”
Laborde added that part of being realistic is understanding that sometimes reality gets in the way of a well-documented plan.
“Maybe my annual projection is I’m going to do $500,000 in revenue, and it’s going to cost me $400,000, so I’m going to make $100,000. That’s great,” he said. “But you have to kind of play that out and think about what can go wrong. What might make you stumble, and if you did stumble, are you going to be able to recover from that?”
5. Maintain a relationship of trust. Once a loan is approved, the best way to maintain trust — and a solid relationship with a lender — is to continuously provide a bank with updated financial information, which may be required sometimes quarterly, but at least on an annual basis.
Always make sure you can provide financial information on demand.
“If I ask a company for a current income statement, and they tell me, ‘I have to go back and ask my accountant for that,’ well I know instantly they’re not using an accounting system to help manage their business,” said Laborde. “Even if the information isn’t always the best story to tell, you can at least show them what’s going on and what you’re trying to do about it.”
I advise people to make assumptions and be conservative and realistic about revenues.
