In part one of this series, we shared a few key takeaways from a recent workshop at the Center for Women & Enterprise in Providence, RI for aspiring entrepreneurs looking to obtain bank financing to start, grow or maintain their business, and wanted to expand on that theme in part two. Click here to read part one, which included information on the criteria lender’s look for when assessing a loan application, what preliminary documentation you should prepare, and how to obtain your credit report. Part two will describe key loan terms and business plan components, as well as what financial statements you should prepare with your loan application.
Key Loan Vocabulary
Most likely you are looking to start a business because you have a passion that the world can benefit from, and not because of your in-depth knowledge about loan vocabulary. To help you understand your banker’s language, here’s a glossary of lending terms:
- Micro-loan: A small loan, generally up to $35k
- Conventional Loan: Loans over $35k
- Term Loan: A loan that is repaid through regular periodic payments. Most business term loans don’t exceed five years
- Line of Credit: A credit account that allows a company to borrow, repay and re-borrow up to a specified amount, much like a credit card.
- SBA Loan: A loan that is 50% to 90% guaranteed by the Small Business Administration. Certain fees may apply.
- Fixed Rate: A stable interest rate that is “locked in”.
- Floating Rate: A variable interest rate, with the advantages of a generally lower interest rate and no pre-payment penalties
- PRIME rate: A floating interest rate that commercial banks charge their most creditworthy borrowers, such as a large corporation.
- Credit Score: Lenders generally use a credit score as one factor to determine whether to provide a loan and what rate to charge.
- Personal Credit History: A record of an individual’s past borrowing and repaying behavior, including any outstanding loans, credit cards, late payments, etc.
Key Business Plan Components
If you ask a bank to lend you money, they need to make sure your business is viable and will have the ability to repay the loan. Since bankers aren’t fortune tellers, they want to see your business plan to make an assessment. Your business plan should include these key components:
- Executive Summary: Quick snapshot of your business
- Description of the Business: How your business runs and makes money
- Target Market: Who you are targeting as customers
- Competition: Outline of your biggest competitors
- Marketing Plan: How you plan to market your business
- Financial Projections: Sample or actual sales projections, profit & loss statements, etc.
- Tip: Make sure to explain how you arrive at the numbers presented.
In addition to your business plan, banks want to see your financial statements to assess your loan application. The key statements you should prepare are:
- Income Statement / Profit & Loss
- Balance Sheet
- Cash Flow Statement
It's recommended to justify your assumptions and numbers with research on industry averages.
We hope you find this information helpful. Feel free to ask us any questions in the comments below, or you may be interested in these blog posts: