Important to have a plan
Starting a business? Here are tips to get going

By RALPH CHAPOCO - Daily News

July 26, 2017

Volunteer with SCORE, a free business guidance institution, Marcia Theusch talks about the importance of having a business plan when speaking with a bank Tuesday afternoon at Dunn Bros. Coffee in West Bend.
John Ehlke/Daily News

Most people in the community know Craig Farrell as the West Bend Area Chamber of Commerce's executive director, providing resources and advice to member businesses.

Before that, however, he was a business owner, operating a tour company that provided an excursion for those who wanted to escape the monotony of their daily activities — and Farrell leverages that experience to assist those who manage their own enterprises. That includes securing financing to begin or expand their operations.

“We were a tour operator and we needed a loan because we primarily ran ski tours,” Farrell said. “We had very high volume of business during the months of October to April of each year, but that is all the revenue that came in and revenue would be going out, of course, as you were paying hotels and bus companies. We had reached a point where we had to reserve, in size, so many hotel rooms in Aspen (Colorado), Vale (Colorado) and so on, and they (lodging companies) started asking for large deposits for the next year.”

Farrell added hotel companies needed to even out their revenues throughout the year. Rather than receive money to fund their operations from a handful of months, they wanted to generate money during the remaining times to fund their operations. That is the reason they began demanding deposits to place holds on rooms for guests staying in the future.

Farrell and his fellow proprietors could not pay in advance for the clients’ hotel stays, so they opted to finance that part of their operations — a choice many entrepreneurs make when faced with a shortfall.

For Farrell, it was a straightforward decision. He knew the banker working at the institution.

“We had been working with this bank for many years, and we had a banker who handled our accounts so there was a relationship, which is part of the key,” he said.

Banks and financial institutions base their decision for providing loans on one fact: Will the money they loan to their clients be paid back and be appropriately compensated for it?

To make that decision, they obtain various information from clients to generate models that calculate the probability of receiving those payments.

Scott Heine, a business development officer from Educators Credit Union, said they evaluate a company's finances. He and his colleagues will review the income statement, the balance sheet. They will also ask for financial projections.

“We are going to look to see if they have one,” Heine said. “You would be surprised the number of businesses who come to us looking for a loan, even though they might be in operation for a number of years, they haven't had the cleanest books.”

They will examine not only the revenues and expenses, but also the amount of debt the firm's operators has on their books. They want to know if company leaders owe more money than they can reasonably expect to pay back.

To secure a loan with favorable terms, business owners may need to provide security — or collateral — the bank can seize in case the loan goes into default. The stronger loans have significant assets they use to guarantee the loan, which leads to more favorable terms.

“If you are talking about commercial real estate you are talking about the building,” Heine said. “Then you are talking about the amount of equity that might be in that building already, or looking at the liquid assets the guarantor might looking to put against that loan.”

Creditworthiness is another factor. Those with a strong credit score will likely receive more favorable terms because they have demonstrated they understand how to manage their finances.

The amount of documentation is significant. Chris Jenkins from BMO Harris listed several required to prove the business is real.

“It depends on the type of business, but we need to authorize that it is a legitimate business,” he said. “Obviously we need to know if it is a limited liability company or if it is incorporated. I need the documents for that. We also need to show ownership or if they have a stake in the business.”

Jenkins listed others that include tax returns and proof of assets. The business side includes a history of operating expenses and revenues. Bankers may also request a financial projection for several years into the future.

Marcia Theusch from SCORE, a volunteer organization that assists business owners, suggested setting aside a couple of months to prepare the necessary documentation prior to asking for a loan. Entrepreneurs can use that time to make a business plan to present to loan officers.

“They are going to look at your business idea, your experience in the field, your financial projections, how you project cash flow and if they are realistic, if they are what you say they are,” she said. “Projections are just that — projections.”

She also suggests speaking with several institutions for loans because they vary in their terms and the types of businesses they fund. Some specialize in retail while others provide money for manufacturing.

“Be persistent and do your homework,” Theusch said.