Passion is the true hallmark of an entrepreneur; the courage to take a leap into the unknown. However the excitement that generates the next “million dollar idea” can also cloud an entrepreneur’s judgement as to whether they have a sound business plan behind that idea. Without a concrete strategy, your business dream may stay exactly that: a dream.
So what types of information do lenders look for when deciding which dreams should become a reality? To answer this question and more, Invest Ottawa reached out to Mark Cawley, Director of Lending Operations with the Ottawa Community Loan Fund and Emily Newark, a Senior Account Manager at BDC.
We often hear that entrepreneurs underestimate the information they’ll need to secure financing? What’s your experience?
EN: It depends on the size and scope of the project. The more information you can typically provide the better. Talk to your banker early on so they can give you a detailed list of the elements you need to provide. This way there are no surprises.
MC: They tend to underestimate the quality of the information that is expected and frequently try to compensate with quantity. In the end, so long as there is good supporting evidence that a business idea can be expected to make enough money and potential risks and pitfalls have been addressed, nothing more is required. Nobody should try to start a business anyway without understanding those points clearly themselves.
Is there a difference between a good business idea and a well thought out business plan?
EN: Absolutely. First of all, entrepreneurs need to be prepared to defend their business plan. Bankers and investors in general, expect to see a thought-out business plan complete with a financial analysis section. Be prepared for questions such as ‘what’s your break-even point?’, ‘how did you come up with that strategy?’, or ‘what happens if you don’t land that big client?’. If you’re still in the pre-planning stage, there’s a lot of value in getting in touch with organizations like Invest Ottawa that can help you get ready to approach a lender.
MC: A well thought through plan communicates the good business idea. A good idea without clear communication cannot be shared, the only time that this is not a problem is if no one else needs to understand it.
Outline some of the key metrics you are looking for when an entrepreneur is applying for a loan.
EN: Personally, I look at three key metrics:
- Repayment ability. No one is going to lend you money if they don’t think you can pay it back. Bringing historical financial results or cash flow projections to the table goes a long way. Proof of concept is also critical.
- Shareholder investment or existing equity. No one is going to finance 100% of your startup business. Lenders expect you to share in the risk. As a general rule, the industry likes to see a 25% shareholder investment or a pro forma long-term debt-to-equity ratio of 3:1.
- Personal credit score. If you have personal credit issues, remember to sort them out before you approach a lender.
- Do they understand their industry, their customers and their competitors?
- How are they distinct and do they meet customers’ basic expectations in all other ways?
- How will they actively develop new business (word of mouth and social media are not enough)?
- Why their forecast sales volumes and value are realistic?
- How quickly will they start to make enough money to pay themselves as well as making their loan payments?
- Why are they the people to make the business succeed?
- How much money do they have and how much extra do they need to invest to spend on what?
- And, how do they know all of the above?
How can applicants better understand what is required of them, before they walk into your office?
EN: BDC provides monthly presentations on access to funding at Invest Ottawa. Attending such workshops will give you a better understanding of the different options available to you and will place you in a better position to meet lender expectations. Check out www.bdc.ca and have a look at our business plan template and discover tons of great resources for entrepreneurs, including free ebooks. Or just pick up the phone and call me. I’ll be happy to talk to any entrepreneur about how BDC can help accelerate their business.
MC: By doing background research on potential lenders and their requirements from public sources, by attending informative seminars provided by organizations such as Invest Ottawa and by talking to, and learning from, people who have already been through the process successfully.
The next “Financing Your Business” Workshop takes place at Invest Ottawa on April 8.