Before they lend you money for a new venture, potential small business lenders expect you to prove that the amount is justified. That makes substantiating your request one of the most important things you can do. It’s simply making sure that what you ask for, and the uses you intend for it, are justified.
Proving how much you can justify will help you ask for the right amount and it is worth the time. Here is how it’s done and the five areas lenders scrutinize.
Lenders want a reason a small business loan for a particular amount makes sense for a particular purpose. For government guaranteed or supported loan programs, they want to make sure the money will be used right because it’s taxpayers’ money.
The paperwork is actually fairly simple. Usually, it takes you a few hours to fill out the loan request form for the lender’s first review. Gathering all your evidence can take a few days.
Five Areas
After that, it gets down to the five areas the lender might ask you to back up.
Equity is your money, and possibly other investors’ money, that you are putting into the project along with the loan. The lender needs to know it’s actually there. Usually it means either putting the money into the business bank account or showing them an account where the investor keeps it. The funds should be in the account for at least 60 days. This assures the lender the source is legitimate. Say one investor is putting $100,000 into a project.
If the $100,000 is already in the business bank account, the lender may want 3 monthly business bank statements showing it has been in the account at least 60 days. It may also want a copy of the investor’s deposit (copy of the check or wire slip processed).
Where the money hasn’t gone into the business yet, or has gone in but has been in less than 60 days, the lender may ask for proof of the money. To prove the investor has the money, the lender may ask for three months of the investor’s personal bank statements. If the amount has not been in the investor account for at least 60 days, they will also want 3 months of statements from the account the money has been in. It must be in one single account for 60 days.
The construction or professional fees are often the biggest item on your list. For example, contractor fees, architect fees, legal fees etc. The lender will usually need a written price offer from each of these professions to you in order to consider it. The offer should be official, say on letterhead, detail what the professional is offering to do and be signed. Remember, the lender is paying the contractor, architect or engineer based on the contracts in place. Don’t skimp; construction quotes need to be as close to what the actual job will cost as you can make them. Otherwise, you may have to change the loan later if the quote is off.
Include an itemized list of any furniture, fixtures and equipment you plan to purchase. For anything over $1,000, include a quote or a printout from an online store.
Ideally you’d be fully funded before you sign the lease. You may not be able to wait or risk losing the space. The landlord won’t hold the space forever. If you’ll lose the space unless you sign the lease, you’ll need to sign it before the funding comes in. In that case a term sheet (rent, deposit, address, term, extensions) from the landlord is often sufficient to move toward approval; you’ll bring the full lease at closing.
Working capital is not like the first four items. There is no stack of documents that proves how much you need. The financial projections prove it. Writing an assumptions document - the document where you explain how you arrived at each number on the projections - will be well worth your time.
On the expense side: Check out what similar shops spend on cost, or what percent of sales each expense is. Or get monthly quotes for utilities. Or just set a sensible budget for travel.
There are no magic numbers and when it comes to revenue you are always estimating. No one knows exactly how much money you’ll make each month. At least not from the outset. Use sales per square foot or average spend per customer times monthly projected customers, for example.
Once you have projections, you need to back up working capital in three parts.
First is pre-opening expenses. These include rent, insurance, utilities and training wages before you open.
The second is the cash needed to absorb losses the projections show in the first months.
The last is cash you plan to permanently keep in the business once it is profitable and long term.
Substantiating is worth it beyond getting approved. In doing it, you learn how much you can actually and cannot justify. It helps you and the lender figure out exactly how much it costs and what you’ll really need. It makes it clear and you get benefits in the long run.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
