Grow Your Business—With Help From FNCB

Why a Business Plan is Key

It can be hard to get from Point A to Point B without a map or GPS device. For business owners who want to guide their companies on the path to growth, a business plan serves as that map or GPS.

And in most instances, your bank will want to see a solid business plan as part of your loan application. This accomplishes two main purposes: First, it shows the bank that you are disciplined enough to take the time and effort to think through and create such a plan. And second, it provides your banker with important details about your company’s products, services, marketplace, operations and finances.

There is a wide variety of templates available to help you structure your business plan. Every company’s plan will be different, of course, but most include the following sections:

Business Description — This section should describe what type of business you operate. Do you manufacture, distribute or wholesale products, or provide services? Include details like your location, industry, types of products or services, mission statement and legal form of ownership, as well as your overall vision for the company. Where do you see the company three, five and ten years in the future? How will your firm impact the market and industry?

Management Team —Include detailed bios for yourself and all of your executives and managers. Concentrate especially on everyone’s experience as it relates to your business and industry. The strength of your leadership team is one of the most important factors in your company’s success, so your bank will be particularly interested in this.

Financial Package — Your banker will pay especially close attention to this section, so make sure it is thorough and accurate. The financial package should include a minimum of three years of financial statements (income statement, balance sheet, profit-and-loss statement); pro forma projections, including the assumptions upon which they are based; business and personal income tax returns; a current personal financial statement; and credit authorizations for the owner and principles. An accountant or CPA can help you prepare the financial package, if necessary.

Advertising and Marketing Plan — This section should include details about your marketing mix (online, print, broadcast, etc.), marketing budget, cost of sales, sales force, pricing strategies, and more. It should explain in detail how you will market and sell your products or services and describe your company’s unique selling proposition (USP) or in other words, what is it about your company and your products or services that stands out from the competition?

Market Analysis — Include a detailed description of your target market and industry and a profile of your ideal customer, being as specific as possible. What are current market and industry trends? How is your company positioned to take advantage of opportunities and avoid potential pitfalls? This section is also a good place for a description of your primary competitors and their strengths and weaknesses.

Collateral Sources — Your bank will want to see what kind of assets you can pledge as collateral to support your loan request. If your business plan is viable but your collateral is short, the bank may be able to help you qualify for government lending programs like Small Business Administration (SBA) loans that guaranty a percentage of the loan, thus reducing the bank’s risk.

Operations Overview — Describe in detail how you manufacture your products or deliver your services. What are your raw material and labor requirements? How stable is the market for them and how strong are your relationships with your suppliers? Do you currently own and operate the latest, most technologically advanced equipment? If yours is a service business, explain in detail the process behind how your services are delivered to your clients.

Executive Summary — The executive summary should condense your business plan into one or two pages, emphasizing the most compelling aspects of your company and stressing your USP, in particular. The rest of the plan should provide the supporting details, documentation and backup. The executive summary is generally written last, but positioned at the front of the business plan.

The Importance of Your Credit Score

In today’s society, credit scores are often as closely linked to individuals and businesses as their Social Security numbers and Employer Identification Numbers (EINs) are. So it’s not surprising that your bank will check your credit scores as part of its review of your business loan application.

Therefore, it’s usually a good idea for you to check these out yourself before you apply for financing so you can address any potential problems or issues ahead of time.

Also, keep in mind that since the personal and business finances of small business owners are closely related, banks usually check both the business and personal credit scores of business loan applicants.

Business Credit

Also known as a trade report, a business credit report includes details about your company’s debt repayment and public records, including bankruptcies and tax liens. Your bank will access your business credit report from one or more of the following credit reporting agencies:

Dun & Bradstreet (www.dnb.com) — The most well-known U.S. credit reporting agency, D&B draws upon its vast business databases in order to assign business credit ratings according to its proprietary multi-tiered system, Paydex. Using past payment history and current payment capabilities, the system assigns your business a Paydex score of between 20 and 100, with 80 being the minimum score banks usually like to see in order to approve financing.

D&B also assigns a U.S. Commercial Credit Score of between 101 and 670. Class 1 is considered to be the highest score class (536 or higher) while Class 6 (below 375) is the lowest.

Experian (www.experian.com) — Experian also uses two credit rating systems: Intelliscore, which assigns a credit risk score of between 0 and 100 (the higher the score, the less credit risk) and Vantage Score, which combines your business’ credit scores from various rating agencies into a single score of between 501 and 990. Scores in the 900s are graded A, while 800s are graded B, 700s C, 600s D, and 500s F.

Equifax (www.equifax.com) — Equifax analyzes detailed payment data to assign your business a Credit Information Score of between 0 and 69. Higher scores indicate more risk (over 40 is considered to be the highest risk) while lower scores indicate less risk (below 10 is the lowest risk).

You can order a business credit report from one or more of these agencies by contacting them directly. There may be a nominal charge to order the reports, but obtaining an accurate picture of your business’ creditworthiness before you apply for financing will likely make this money well spent.

Personal Credit

You can easily monitor your personal credit scores as maintained by Experian, Equifax and TransUnion, the three major personal credit reporting agencies. The best way to do this is by ordering a free copy of your personal credit report once a year from each agency at www.annualcreditreport.com (or you can obtain your free credit reports by calling 877-322-8228). One strategy is to order a free credit report from each agency once every four months. This way, you can check your personal credit report three times every year for free.

It’s important to examine both your business and personal credit reports carefully — mistakes and outdated information are not uncommon. If you find any errors, contact the credit agency immediately to get them corrected and to update any old information.

The most important criteria considered by the credit reporting agencies in determining credit scores (both business and personal) is whether or not bills are paid on time. So the best way to boost your business and personal credit ratings is to pay all of your bills either on time or early.

If you currently have past-due bills, pay these (along with penalties, interest and late fees) as soon as you can. Then resolve to pay all your future bills in a timelier manner. Here are a few other things you can do to boost your personal credit score:

• Develop a budget — and stick to it.
• Pay off any outstanding debt as quickly as you can.
• Limit the number of new credit accounts you open in the months preceding your loan application.
• At the same time, don’t close old credit accounts in the months preceding your loan application.

Triad of Advisors: Your Business Advisory Team

With the complexity of running a business today, no business owner can afford to go it alone. You need to surround yourself with knowledgeable professionals who can offer objective, unbiased advice and assistance. This is true regardless of the size of your business — whether it’s large, small or somewhere in between.

For most companies, a business advisory team should consist of three key professionals, who are sometimes referred to as the “triad of advisors.” The partnerships and communication among these advisors and yourself are crucial to every aspect of your business’ success, including financing:

1. Banker — Obviously, your banker is one of the first people you will turn to when you need business financing. In addition, your bank provides a wide range of financial products and services you need to run your business, including business checking and savings accounts, business credit and debit cards, cash management services, merchant services, and trust and investment services on both the business and personal sides.

However, your banker can provide much more than just financing and banking products and services. As a trusted advisor, he or she can also provide a wealth of advice and assistance when it comes to running your business. Your banker has worked with many other businesses just like yours and can leverage this experience to help you meet a wide range of business and financial challenges.

2. Accountant/CPA — The financial and tax aspects of running a business can get very complicated. Therefore, you need an experienced business accountant/CPA on your team who can help you navigate this complex terrain. The services provided by a business accountant/CPA include:

• The preparation of annual tax returns, both business and personal.
• Strategic tax planning.
• The preparation of a business loan financial package, including the creation of financial statements according to Generally Accepted Accounting Principles (GAAP).
• An IT audit and review of internal controls to guard against fraud and embezzlement.
• A review of internal processes, policies, procedures and systems.
• Assistance in setting up employee benefit plans and making sure they remain in compliance with regulations.
• Business valuation and transactional advisory.
• Corporate governance, risk and compliance.

3. Attorney — In today’s litigious society, having legal business representation is essential. Therefore, you should look to establish a relationship with a business attorney who is experienced in your particular industry and can offer strong litigation representation as well as value-added advice and assistance. A business attorney can provide a wide range of other valuable services, including:

• New business formation, including establishing articles of incorporation and other business ownership documents.
• Contract preparation and review.
• Business succession planning, including drafting a buy-sell agreement.
• Formulating asset protection strategies, both business and personal.
• Helping ensure regulatory compliance.
• Buying another business via a merger or acquisition.
• Trademarks, copyrights and product licensing.
• Protecting trade secrets and intellectual property.
• Consultations involving the nuances of employment law and representation in employment-related lawsuits.

Commercial Financing Options

Business growth often requires access to commercial financing. Commercial loans provide an immediate infusion of funds that can be used for a wide variety of growth purposes: one-time expenditures (like fixed-asset purchases), permanent working capital, expansion or acquisition, or taking advantage of growth opportunities.

But while it’s one thing to realize that your company needs financing, it’s just as important to know what type of financing you need. All commercial loans are not the same, and getting the wrong type of financing can end up doing more harm to your business than good.

Here are some of the most common types of commercial financing and their typical uses:

1. Line of Credit — This is the most common type of business loan. With a business line of credit, you can access cash up to your pre-approved credit limit whenever you need it, without having to wait for bank approval. It’s often a good idea to establish a line of credit with your bank before you actually need to borrow money. This way, it’s readily available when you do — all you have to do is write a check for funds up to your credit limit.

A line of credit should be used primarily for short-term, recurring cash needs — such as plugging short-term cash flow gaps, funding accounts receivable and purchasing seasonal inventory — not for longer-term financing needs.

2. Term Loan — This is an amortizing loan that’s typically used to finance the purchase of fixed assets like plant, property and equipment. Unlike lines of credit, term loans are longer-term in nature and should match the depreciable or useful life of the asset being financed. Term loans may also be used to finance permanent investments in accounts receivable or inventory.

Repayment is based on a predetermined schedule or by making monthly principal and interest payments. A term loan can be secured or unsecured, and the interest rate is generally fixed for the life of the loan.

3. Time Loan – This type of loan, which can be secured or unsecured, is generally used for short-term working capital or bridge financing. Terms may go up to 24 months and the interest rate may be fixed or variable, with interest generally paid on a monthly basis.

4. Commercial Mortgage – This type of loan is used to purchase, expand, improve or refinance existing commercial property, including office buildings, warehouses and retail space. The loan is secured by commercial real estate and terms may go up to 20 years.

5. Construction Loan — This type of loan is used to finance the construction of owner-occupied plant and buildings. The loan is secured by commercial real estate, with monthly interest-only payments due during construction and monthly principal and interest payments due after construction is complete.

6. Government Loan Programs — The U.S. Small Business Administration (SBA) offers several different types of government-guaranteed loans designed specifically for small businesses. For SBA loan purposes, small businesses are defined as companies with tangible net worth of less than $15 million and two-year average net income of less than $5 million. The most popular SBA loan programs include:

• SBA 7(a) loans — These can be used to finance practically any business need, included acquisition/expansion, permanent working capital, franchise financing, commercial real estate, building renovations or improvements, equipment, and inventory. Loan maturities range from 10 years for business acquisition/expansion to 15 years for equipment and 25 years for commercial real estate.
• SBAExpress loans — This loan program accelerates the turnaround time for the SBA’s loan review to just 36 hours. Minimal paperwork is required to apply, and the maximum loan amount is $350,000. SBAExpress loans can be issued as either term loans or revolving lines of credit, and they may feature lower interest rates than other types of SBA loans.
• SBA 504 loans — These provide long-term, fixed-rate financing primarily for the purchase of owner-occupied commercial real estate; machinery, equipment, furniture and fixtures; and business expansion, upgrades or modernization. The SBA provides 40 percent of the total project cost while a participating lender provides up to 50 percent and the business contributes the remaining 10 percent.

Why Choose a Community Bank?

When it comes to commercial banks, there are two broad categories for small businesses to choose from: large, regional banks and community banks. Community banks are often the best choice for small businesses for a number of reasons.

Many large banks aren’t set up to work closely with small businesses. As a result, these businesses sometimes slip through the cracks. Community banks, on the other hand, are structured so that bankers can take the time to listen carefully to their small business customers in order to fully understanding their banking and financial needs. Community banks analyze all the facts before making financing decisions, and they sometimes have more flexibility to be creative in structuring financing solutions.

Here are five specific reasons why you should consider a community bank for business financing to support your growth:

1. You’ll receive more personalized service. Community banks provide a high level of personalized customer service to small businesses. They make the effort to get to know their small business customers and understand their particular needs and concerns, including making on-site visits so they can actually see the business operations up-close and personally. Having a close, personal relationship with your community banker can make all the difference when you have an urgent financing need or run into business or financial difficulty.

2. Decisions are made locally on a case-by-case basis. Financing decisions at community banks are usually made locally, by lenders who know your local market area — not at a far-off headquarters like is often the case with large, regional banks. And they’re made on a case-by-case basis, instead of according to pre-determined formulas, which often gives community bankers more flexibility to consider extenuating circumstances that might result in a loan approval.

3. Your community banker is a trusted advisor, not a deposit-taker. While community bankers have earned a reputation for delving deep into the numbers – financial statements, transactions and projections — they are much more than just number-crunchers. A community banker also serves as a business coach, mentor and trusted advisor.

As such, your community banker can provide a wealth of advice and assistance when it comes to running your business. Your community banker has worked with many other businesses just like yours and can leverage this experience to help you meet a wide range of business and financial challenges. This distinguishes community bankers from “deposit-takers” at some larger banks.

4. Your community banker will offer strategic, customized solutions. No two small businesses are exactly alike, so business banking solutions aren’t one-size-fits-all. Your community banker will strategize with you to develop a package of customized solutions that are tailored to your business’ current situation and your plans and goals for the future — they aren’t just “canned” solutions pulled off of a shelf.

5. Your community bank has cash management expertise. Many small businesses today rely on sophisticated cash management services that previously were only available to large corporations. Community banks specialize in offering the latest in small business cash management products and solutions. These including Remote Deposit Capture, cash management sweep accounts, online banking, online wire transfers, merchant card services, and report uploads and downloads to your accounting system.