Most early stage companies don't launch IPOs to raise money. More commonly, entrepreneurs use their own money or funds from friends or family in the start-up phase of their venture. More than likely, however, the day will come when they have to approach a bank for a loan.
Unlike entrepreneurs, angel investors or shareholders, banks aren't investors. Rather, they're in the lending game to earn interest on the money they lend. To ensure that that happens, banks hedge their bets and reduce their risk by evaluating how likely a client is to make the business a success and make good on a loan.
One way of gauging that is to determine how much of their own assets business owners have devoted to the venture, says Wendy Anderson, vice president of business development at Citizens Bank.
"Banks will want to know what you have put at risk," says Anderson.
Lenders want to know how much of your savings you have put into your business and if you have borrowed against a retirement plan, an insurance policy or your residence. In short, they want to know if you have enough confidence in your venture to put your own assets at risk.
When you approach a bank for a loan, be prepared to provide information about your business. Your banker will want to know names and Social Security numbers of the owners, the legal structure of the business, the purpose of the loan, how much you are seeking to borrow and how much money the owners have put into the business. He or she will want to know the profile of your customers and the nature of your market. And the banker will want balance sheets and income statements for the previous three years or a three-year projection for a start-up.
And be ready to showcase your ability to run your business successfully.
Says Anderson: "Explain your background to demonstrate your expertise or that of other people in the company." HOW TO REACH: Citizens Bank, www.citizensbank.com