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Business Financing Application Summary Overview

In addition to the standard information a lender may request, you should always provide your own summary overview of the information package.  This can be short or very comprehensive depending on the capital request being made and the amount of explanation that needs to go with it.

The application summary overview is in many ways like a formal capital request to a business board of directors.  And regardless of business type or industry, most boards want the following three questions answered…

  • Where are we at right now?
  • How did we get here?
  • Where are we going?

Let’s explore each one.

Where Are We At Right Now?

Decisions are made in the present so it’s important to have an accurate picture and context of a business’s financial, operational, and market position in order to have a base to work from.

The current snapshot of the business is grounded in the financial statements and supporting documents for the current fiscal period.  Everything in the business can be quantified into the financial statements and then further elaborated on with summary explanation if required.

The current health of the business is always important to determine before incremental borrowing is added.  Lenders do not typically look at a financing request in isolation but make some effort to see how incremental financing is going to fit into the overall picture and will the impact be largely positive or negative?

This is also where disclosure and context come in.

It’s important to show with numbers and explain in words the financial health of the business.   Part of this health picture is to also provide an overview of the business operations and market position, emphasizing the key areas that directly impact the financial results.

How Did We Get Here?

 This is primarily a historical financial statement review and comparative analysis of past years and the current year.

The current financial position is basically a moment in time.  Answering the question, “How Did We Get Here?”, highlights and explains the key events, initiatives, competitor actions, etc. that collectively explain the key financial drivers as well as any unusual elements in the results.

When I was a CFO, the general manager always wanted me to provide a monthly “bridge report” from the past financial period to the present that showed all the key drivers, revenue or cost item, that collectively created how the current bottom line was formed today over the previous 12 month period.

Whether this is a board of directors, or a lender reviewing an application, this section shows that you had a plan and you have the ability to track the results from your plan.  This shows that the business direction is intentional and is of a make sense nature providing greater confidence in decisions going forward.

That doesn’t mean that all information reviewed is good news.  Things will happen over a course of a year or more that could not have been predicted or planned for.  But the disclosure of negative items, as well as how they were dealt with, also builds credibility.

As previously mentioned, Lender reviews are typically only an inch or so deep, so its not like you have to go to any great lengths to describe your financial performance.  But some effort in this regard can be effective in creating a positive assessment of the business.

Where Are We Going?

This section is all about the business going forward and how your capital request fits into the future view in terms of revenues, operating costs, balance sheet, and cash flow impacts.

Incremental business financing typically has some impact on the go forward cash flow and net revenues, so its important to show the impact of new capital on the business and all the assumptions made to create a financial projection.

With respect to financial projections, the amount of work you need to do when building out a proforma is totally relevant to what you’re planning to do.  For instance, if you’re a new owner operator, you can get away with an average monthly projection of operating revenues and expenses because of the highly predictable nature and month over month consistency of a contracting operation that only requires one piece of equipment.

At the other end of the spectrum, any major change in business operations should look at forecasting for a period of 1 to 5 years depending on the size of the investment and length of time to fully implement and benefit from the capital expenditure.  While balance sheet, income statement, and cash flow projections all provide value to a reviewer, cash flow forecasting is always going to be the most important to determine the debt servicing capacity of the business for any existing and proposed debt.

That being said, when you’re looking at bank financing options, there are likely going to be financial covenants required in any approval that may be granted, so the projected balance sheet and income statement will be necessary to determine if the go forward business operations its capable of meeting bank covenant thresholds.

Many forecasting suggestions will talk about providing some sort of sensitivity analysis to provide a best case to worst case scenario picture of the go forward business plan.  While sensitivity analysis would potentially be useful, it can take a considerable amount of time to prepare a report that is more useful than confusing.  My standing recommendation on this item is to project conservatively to the point where your net cash flow can service debt and also provide for a cushion.  The sensitivity aspect can be covered off in your explanation of key assumptions where you can state the low and high end of the range for each key driver of the business with the projection utilizing the lower end of the range.

The entire summary overview should focus on sufficiently explaining all numbers and assumptions made so that a financing reviewer/decision maker doesn’t need to make their own assumptions.  The primary goal of this summary narrative is to assist with accurate understanding and comprehension of not only the financing request, but the financial health and operation of the underlying business.

I cannot emphasize enough that many business financing applications are not successful because of bad reviewer assumptions or misunderstandings that are borne out of the information provided to a lender. 

Always remember that business financing is a volume business, run by humans with varying degrees of experience and ability.  The more clearly you can convey your information, and present it in a manner that fits what the lender is expecting to see, the more likely you’re going to get an approval for terms that are acceptable to you.

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