Small Business Loans Terminology - Words to Know
Advisory Board - This is a formal version of getting together with other business people and discussing your ideas and concerns. It should be composed of experienced people with a genuine interest in your business and desire for it to succeed.This can be an excellent resource to bounce ideas off of, and a source of ideas and expertise that should be a part of any management resources section in a business plan, no matter how small the business. It can also be very helpful to include an advisory board when writing a business plan for a loan application, as it offers an additional measure of security and know-how in your company, as well as keep you grounded.
Business Plan - This document serves as a blueprint for developing your business. You want it to look as professional as possible, especially if you’re asking for money. Pay attention to spelling, margins, and formatting, and get it professionally printed and bound. If you’re unsure about doing it yourself, there are consultants that specialize in doing so. There are certain sections that it should have, regardless:
The Executive Summary - this summarizes the key elements of your business plan and will be the first thing anybody reading will look at. Think of it as cliff notes for the rest of the plan.
The Industry - this should provide an overview of the sector your business will be a part of, including major trends and players, estimated sales, and a summary of your company’s place within that framework.
Market Analysis - this section examines the primary target market for your business, including but not limited to their needs and how they’re being met, as well as geographic location and demographics. The idea is to show your prospective lender that you have a good handle on the people you are planning to sell your product or service to, and that it is so comprehensive you can make predictions about their consumption.
Competitive Analysis - as the name says, this is an in-depth examination of both your direct and indirect competitors, assessing their advantages and how you plan to overcome these. The idea is to be persuasive about your company’s ability to distinguish itself from the competition.
Marketing Plan - this should provide a detailed explanation of your sales strategy, pricing plan, proposed advertising and promotion activities, and product or service's benefits. In presenting your Unique Selling Proposition --what specifically sets your product or service apart from others-- the marketing plan should describe how you’re going to get your proposal to market and get people to buy into it.
Management plan - this includes your businesses’ legal structure and management resources: the management team, external management and human resources needs. If the goal of your plan is to obtain funding, this section should mention an advisory board as one of the management resources.
Operating Plan - this is more basic information, such as a description of your physical location, facilities and equipment, employees needed, inventory requirements and any other relevant operating details.
Financial Plan - this is all-important. Here you’ll describe your financial requirements, your detailed financial statements and their analysis. This section must include the balance sheet, the income statement and the cash flow statement -- in the case of a new business, instead of a cash flow statement, you’ll include a cash flow projection--.
Appendices & Exhibits - here’s where you can include any additional information that can enhance the credibility of your business idea, such as marketing studies, photographs or mockups of your service or product, and any legal documents relevant to your business.
Business revenues - This refers to the amount of money a business receives during a given period of time, including discounts and deduction for returned merchandise. It is the gross income figure which must be subtracted from to calculate net income. Every lender will require full disclosure of this information --usually for the last two to three years-- as well as your Debt Service Coverage Ratio (DSCR). When starting a business, you’ll have to make projections for this number, based on the expected performance of your business.
Capacity - This refers to the repayment ability of your business. In any loan application, you must explain exactly how and when you intend to repay it. This is determined both from revenues and expenses, but also takes into account your cash flows and their timing. Credit history is also a factor in capacity, as all lending institutions will study your credit and repayment history in order to determine your risk factor. Remember to include every possible repayment source when you fill out your application.
Capital - In this case, capital refers to the owner’s investment in the business. This should be a significant amount for a lending institution to even consider proffering a loan, and the officer in charge of your application will evaluate this factor carefully, both in terms of amount and quality.
Collateral - Collateral is the sum total of assets you own personally that can be provided as security for a loan in case of default. The more collateral you possess, the more likely your loan application will be approved by a bank. Alternative lending platforms generally don’t require as much collateral, if any, but they might place a lien on your business assets, which gives them permission to seize any assets belonging to your business if you can’t repay the loan.
Conditions - This is a manifold term, as it joins the overall economic climate and the general external environment surrounding the particulars of the lending institution and the borrower. During a period of recession or tight credit, it is small businesses that have the most difficulty meeting their repayment period, and also more difficult for the lender to obtain the funds for the loan. The second element in conditions relates to the purpose of the loan, whether it be for purchasing equipment or seasonal inventory buildup. When filling out the loan application, you must detail what the money will be used for.
Credit Score - Of all the qualifying factors lenders look at to approve loans, this is the single most important. If you have good credit --680 and above-- it makes it considerably easier to apply for both a bank and an SBA loan. When first starting out in business, your personal credit score weighs more than when your company is more established, and has good credit standing of its own.
Debt Service Coverage Ratio - This is the amount of debt you have relative to your income. Banks generally favor a DSCR of 1.25 or higher.
Lender-Agnostic Market - While not lenders in and of themselves, these marketplaces put borrowers in touch with both traditional and alternative lenders. Examples include Lendio and Fundera.
Personal Guarantee - This is a personal promise made by the borrower to pay the loan out of your own pocket if the business fails or cannot meet the terms. This usually works by first liquidating whatever collateral you put up and then require you to pay the remaining balance. Most bankers and lenders require a personal guarantee.