How to obtain financing
A good business plan -- and all the right answers are important
The etrnal dilemma: you have an idea, someone else has the money.
To solve this dilemma, smart businesspeople will take stock of their resources, investigate all possible sources of funding, and step forward with confidence.
“Small business people sometimes fear how their banker is going to respond to them, and based on that trepidation are reluctant to apply for the loans,” said Thomas Marciniak, vice president and manager of the community business division of Bank One Milwaukee N.A. In fact, said Marciniak, banks offer funds at the most favorable rates available, and are in business largely to see that money gets into the hands of those who can best use it.
If you believe a loan will help your business, first do some research.
Start at the bank
A good place to start, appropriately enough, is a bank, which typically has a wealth of brochures and booklets describing its lending activity to small businesses. The banks do much of this lending in conjunction with national agencies such as the U.S. Small Business Administration of the local Milwaukee Economic Development Council.
These organizations supply loans or loan guarantees to companies without the size or clout to qualify for traditional financing. Banks work with these organizations to provide funding for all kinds of small businesses.
You ought to have some things in hand before applying to a bank for a loan. Put together financial statements for the past two or three years. Also important is a business plan -- this item will perhaps be a bit more involved than the first.
A business plan, in a nutshell, explains to a bank why you need the money and how you are going to pay it back. Sounds simple, but it’s not.
“A lot of times we get business plans that are just a lot of numbers,” said Marciniak. “We really don’t know what’s behind the numbers."
The trick is not to try to overwhelm the bankers with numbers (it’s sort of like challenging a Milwaukee Buck to a free throw contest). Rather, you need to describe your business in a way that distinguishes it from others in the same market.
Do your homework
If you’re starting a new business, you might have to do some research on what other kinds of similar businesses are out there, and then come up with an honest assessment of how competitive you will be.
If you want to expand your business, you will still have to convince the banker that your situation is worth the expansion. And remember, banks have access to computer data bases on a multitude of markets and potential markets; they are not going to be conned by a polished but largely fictional look at the market you see yourself capturing.
Back to the number crunching: A bank or any lender will need to have some clear data on your likely income during the term of the loan. An established business will be best served by a track record of earnings, but a new business must rely on projected earnings. This data ought to be realistic; the key here is the cash/trade cycle -- or the time between your delivering a good or service and your receipt of payment.
“(The cash/trade) cycle will often be far more extended than the entrepreneur anticipates,” said James Longe, vice president of small business lending for Firstar Bank Milwaukee N.A. The customers of small businesses, particularly new small businesses, frequently manage to negotiate payment delays that confound a loan recipient’s projections on earnings, said Longe.
Various educational institutions provide courses on creating business plans. And you can hire a company to do one for you. The problem with this second route, said Longe, is the plan might come out sounding "so canned, you don’t get the flavor of what’s going to make the business different."
A loan interview sometimes plays an important role in the application process. Here, a banker will ask questions such as “what happens if your partner dies?” Your answers to these questions will help a banker assess your degree of business acumen and thus your suitability as a loan client.
Consider other options
If you have a good idea for a product or service, but don’t have a track record of earnings, or a polished business plan or some outside income or collateral, it might be best to start with a non-traditional source of funding. The Wisconsin Women’s Business Initiative does “character lending,” according to president Wendy Werkmeister. This means the organization is interested in the kind of person you are and in your "well-thought-out idea.”
About 85 percent of the WWBI’s loans are to women-owned businesses. The WWBI is the largest micro-lender in the state, dishing out loans from hundred of dollars up to $25,000, said Werkmeister. Forty percent of the loans the WWBI makes are accomplished with the participation of banks, she said.
Other legitimate but nontraditional sources of funding include venture capitalists, who are looking to take a risk on a brilliant new idea or invention, but are likely to demand some decision-making role in the company. Another source is friends and family members, a low-cost alternative that carries its own set of complications.
-- Alison Grillo
The Business Journal, Milwaukee, 01/27/96