Are financial projections needed for taking out a business loan?
I am thinking about taking out a loan for my business. I know I need to put together a business plan for the bank and should include all historical financial data. What would I include for financial projections? And if financial projections are included, how many years ahead do I need to project?
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Sep 28, 2016
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Dec 19, 2014
It will depend on the bank. But if you are in business, any kind, you have to know your numbers, so you do need budgets, forecasts and financial projections in general. This is a must for any business of any size
Dec 8, 2014
Walter's answer is correct. I would also add that if you are questions on the figures, for your forecast, be able to explain how you arrived at the numbers.
Nov 25, 2014
Any application for finance will need sale and cost projections, whether it's an invitation to invest, an application for a grant, or an application to borrow. Three years is usually good enough, but check with your advisors what you should show.
The challenge is not actually writing the forecast, though - the only thing you can know for certain about any forecast is that it will be wrong, and your potential lender or investor will anyway assume this - it is understanding the assumptions you make when forecasting your sales and costs, and then being able to articulate them when challenged in order to justify your reasoning.
Ideally, you should have a model that you can flex in order to show good, average and poor projections. We use the Edge Financial Forecast model, http://www.edgeforecast.co.uk/, for our clients.
Nov 21, 2014
Hi, Thomas, I'm a SCORE mentor and business coach/consultant. You will need a cash flow projection for at least the next year, and possibly 2-3 years. You can download (free) templates for the financials from the SCORE.org site. You are also likely to need your personal financials (balance sheet, tax returns) for the last 3 years, depending on how long your business has been in existence, your role in the business and what type of loan you're looking for. You could also check out the SBA guaranteed loans to see if you/your business qualify.
Nov 19, 2014
It will depend on the bank, the amount of the loan, and if you have any collateral. If it were me, I'd want to have projections for my own purposes anyway to make sure I can repay the loan.
Nov 19, 2014
I think you should try to do financial projections for 3 years...Using sales forecasts that are made up of best case, worst case, and realistic for all 3 years...Then have a flexible budget for based upon each case of sales
Nov 19, 2014
For borrowing up to £25,000 1 year's projections should be enough. 3 year's would be necessary byond that. The financial projections, which incidentally start with a current balance sheet (statement of affairs showing what is owed and due to the business and other assets and liabilities) should be integrated and include at the minimum Cash Flow, Profit and Loss and Balance Sheet projections. You would include:-
Income Sources (and when receivable)
Cost Of Sales or Services
Overheads
Any other financing
Capital Expenditure required with details.
Drawings or Remuneration of all staff and owners/ directors.
Nov 19, 2014
Financial projections for three years are sought by the bank- but remember they are just that- projections- they therefore need to be realistic and achievable- if you cannot achieve your projections they will be consigned to the dustbin
Nov 18, 2014
Yes. Usually it would be better for you to prepare a P&L and cash flow projection with focuses on resources of revenue, GP, and high level capex and major expense items. meanwhile a decent description of your business model will surely help others gain confidence in you.
With regards to years, it really depends on how soon your cash flow will allow you to pay back the loan.
Nov 18, 2014
The requirements are set by the lender and what they want will depend on what they use as collateral for the loan. If you have hard assets that are "unencumbered" they may serve the purpose. If not and your business cash flows will be used as the backing for the loan, then both historical sales & revenue along with projections of future revenue will become relevant.
A quick search on-line will turn up several options for business plan templates. Here is one example: http://www.lawdepot.com/contracts/business-plan/?loc=US&pid=msnppc-buspln_US-generic_c1-msnkey_business%20plan%20template&utm_source=bing&utm_medium=cpc
Nov 18, 2014
S. Thomas;
Financial projections are vital to taking out a business loan. Your financial projections play a key role as to how much or even if you can get a business loan. In regards to your business plan and including financial data and projections, you want to give as much historical data as you have and your projections should go at least 5-10 years. Some banks may ask for up to 20 years but you would need to find out what they prefer.Hope this helps.
Nov 18, 2014
I would say yes they are needed for your first three years. Although i don't think that banks take the financial projections as a strong contender to give you the loan. In my opinion the reason banks want to see the financial projection in your business plan is to see if you have a realistic idea of what to be expecting those first hard years.
Nov 18, 2014
Easy check point from a banker point of view. Prove that the you are able to return the amount you like to borrow. 1. Show profit in your forecast (support that using your historical numbers). 2. Build positive cash flow statement to demonstrate the ability to repay the loan (get good accountant to do for you).
How many years for the cash flow? 1 year forecast will do ...with logistic display for the 1st 3 to 6 months. People normally not trust forecast data more than 1 year.
If you have Collateral will be great. I just get a client to secure $1.5 million starting without collateral but ended with genuine collateral without additional investment. If you come without collateral, you need to build that genuine collateral which is what I had done without additional investment, this will give you higher chance to secure loan.
Last advise - your business must be or to be profitable, else the loan you going to secure will become your everyday nightmare.
Nov 18, 2014
Banks really prefer 3 years projections with historical. The projections should include projected revenue and expenditure. It should show an increase in sales from the previous years or indicate when is your low season or peak season. The projections should also show, the use of the funds you are borrowing, how that will positively affect sales and how will you be able to repay the loan. so Your PROJECTIONS should include the proposed loan repayment amount and the cashflow ability to repay on a monthly basis
Nov 18, 2014
A few factors factors that affect your business loan application:
1. Business history- most banks will consider lending for business at least 3 years and above. New business generally can't obtain loans even they have fantastic business plans
2. Type of business- some business are generally less risk compared to other and the chances of getting loans are easier
3. Purpose of the loan- loan for working capital purposes are more difficult to get compared obtaining loans to buy specific assets for production purpose
4. Collateral - banks seldom lend without you putting assets as collateral
5. Which bank you approach- banks have different preference in providing loans to certain industies, customer segments etc. Approach the right banks will also help you to reduce the paper work and improve the chances of getting a loan.
If you have a specific bank in mind, check with them what they expect from you to improve the chances of success.
All the best to you!
Nov 18, 2014
Generally yes but if you have a long business history less so, or assets for collateral.
Usually you cannot get a business loan for a new/startup business based on projections. This is because bankers are not in the risk business at all. Their margins do not support many failures. Venture capitalists, angel investors and others are in that space and demand 30-40% annualize return fo rthe risk to make up for the large number of failures.
Any sophisticated investor is going to do their own calculations. The only guarantee in an investments is your will never come true.
Typically a 3 year projection is best. Projections include standard Profit and Loss format with line itemization of all expense and revenue categories.
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Nov 18, 2014
Hi there,
I have a friend who helps businesses put together business loans. He used to be a business banker, so he can walk you through the process. If you are interested, I'd be happy to connect you to him.
Nov 19, 2014
Thanks Taylor, I'm not quite there yet... but I will reach out when I have my affairs in order.
Nov 18, 2014
Having worked in business banking for a large regional bank, we never lent solely on projections. Just too risky. Depending on the loan size, we looked at credit, collateral (AR, Inventory & fixed assets), income and balance sheets, trends, and the strength of the personal guarantors.
Smaller community Banks may provide loans to businesses with less history and look at revenues and expenses per month. It depends on the type of business too. Some are considered a higher risk. Doing the research and completing your plan is always a good move and may help a lender make a decision.
To your success and good luck,
Christine
Nov 18, 2014
I've been through it. They want 3 years of tax returns and a current profit and loss statement along with collateral and personal guarantee to payment of loan. Collateral needs to be highly disposable, such as certificates of deposit, personal assets (car, house, stocks, bonds and other securities, etc.), business assets (equipment, etc.). Collateral must be at least 80% of the loan value. They prefer CDs, stocks, bonds and other securities as compared to hard assets.
All good things to keep in mind, thx.