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?
Short answer - at least years 1 to 5
Long answer - It is best to check with the bank as to how that want to see the numbers. But generally you need to break down all income and expenses by month for the first year, by quarter for years 2 and 3 and by year for years 4 and 5.
Thanks Walter, the break down of the years by month, quarters, etc. really helped.
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,
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.
Absolutely. Even if they didn't ask for them, you need Cash Flows by the Month for the first 2, really 3 years so you know what to expect.
Many people think using their own money or inherited money gives them permission to skip creating cash flows. Not so. It is just as important. Cash Flows are not a guarantee but better than going into spending lots of money not knowing how it will work out.
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.
It sounds like you need a business coach or mentor. Email me at bnorton at airtightmgt dot com and I will give you a free call to assess the situation some. I also have a full course on raising funding here:
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!
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.
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.
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.