1. Maybe you have been thinking about starting a new business. You have identified a market for
the product or service, done your research and found the perfect location. Like most growing
or start-up businesses, you need capital to support the project.
That means it is time to meet with a bank or a capital
source to pitch your idea. And obviously after you
have presented your plan, you want a positive
response. To improve your chances, your loan
package or pitch book should answer this important
question: “How are you going to pay the debt back?”
I hope that the information in this paper will be
helpful as you prepare your presentation. More
importantly, I hope that this information will improve
your chances of obtaining the type of capital you
need on terms that are acceptable to you.
1. Your credit package should tell your story.
A credible financial package should include the
following components:
i. An overview of the company to include thorough
background information on the existing business
or on the proposed idea. You should describe the
product or service, explaining the market for it
and its competitive advantage.
ii. The overview should provide a thorough
background on the sponsors to include
their qualifications, education and relevant
work experience.
iii. A convincing argument is you know what you
are doing, especially if you are starting a new
business, making a significant career change
or implementing a major change in business
strategy or product offering.
iv. A detailed explanation of the sources and uses of
the proposed capital and debt.
v. If this is an existing business, three years of
historical financial information on the company
(CPA prepared financials with footnotes).
Business tax returns will work. Also include
company-prepared interim financial information
for the current year.
vi. If this is a new venture or an existing business,
two or three years of pro forma statements.
The numbers should be based on industry
performance or your prior work experience.
The pro forma needs to be reasonable and
obtainable. It is extremely important that you
hit whatever financial benchmarks established
in the budget, whether it is top line revenues
or bottom line profits. Doing so will earn you
credibility going forward.
vii. Financial information on the owners/guarantors
(anyone with ownership 20%). This includes
a current personal financial statement,
with schedules completed with supporting
documents. It also includes two years of personal
tax returns with K-1’s for all related entities/
projects.
Five Strategies to Consider
as You Seek Capital for Your Business.

2. 2. Prepare in Advance
Every person and company has a certain amount of
borrowing capacity. Prepare in advance for your loan
request to put yourself and the company in a position
to borrow money! Your prospective lender will take
the information that you provided from Item #1 and
calculate your borrowing capacity. The lender and his
analyst will:
I. Input the financial information contained in the
corporate financial statements into a financial
statement software package. This enables the
analyst to compare and contrast the company’s
historical financial results in a consistent format.
II. Calculate a corporate Debt Service Coverage
ratio (DSC). The calculation for the DSC is
EBIDA / Annual Debt Service. EBIDA stands
for “Earnings before Interest, Depreciation,
and Amortization.” At a minimum, a lender
will require a 1.25X’s debt service coverage.
The bigger the number, the better.
III. Pull the guarantors’ credit report and calculate
a Personal DSC ratio. The calculation for
personal DSC is similar to a Debt-to-Income ratio
for a consumer loan but calculated to fit the
commercial underwriting template.
IV. Calculate a Global Cash Flow by combining DSC
and DTI ratios of the borrower and guarantors.
Although there is no definitive GCF ratio, it
should be higher than 1.25X’s.
V. Review and confirm the liquidity of the borrower
and the guarantors. Liquidity includes cash,
marketable securities, corporate accounts,
and Cash Value Life Insurance. It does not
include IRA’s, 401-K’s or liquid assets held in
a joint accounts.
VI. It is still a fluid process and the analyst may have
questions. Don’t take this personally. He is trying
to better understand the business and the loan
request. He or she is trying to help.
3. “What’s the rate?” is not the right question.
Here is a simple truth. Your capital source wants
to be fairly compensated for the risk that they
are taking.
I. When negotiating with your capital source,
remember this: Pricing and rate are important
but they shouldn’t be everything.
II. Rate is a function of
A. The lender’s cost of funds
B. The risk of the venture
C. The extent of the banking relationship
You cannot control an investor’s or a bank’s
cost of funds. However, you can control some of
the risk component and the entire relationship
component. How?
• Reducing Risk – examples would include
putting more equity in the deal; offering
adequate or additional assets as collateral;
providing full, joint and several unconditional
personal guarantees; requesting shorter
loan terms and amortization schedules.
• Relationship – move as much business
to the lender as is reasonably possible
to include the commercial checking
accounts, any related debt, merchant
business, credit cards, personal loans
and personal checking accounts.
III. Banks use a tool called a RAROC model (Risk
Adjusted Return on Capital) to help calculate a
targeted interest rate. It is too complicated to
explain RAROC but you should understand that
there is a method to a bank’s pricing process.
IV. Investors use an IRR model (Internal Rate of
Return) and will strive to hit target returns
based on the estimated risk of the project.
You can Google IRR if you want to see the
actual calculation.

3. 4. Acquiring capital is difficult.
In fact, it could be the hardest part of your business
plan. Therefore...
I. Expect to be told “no.” Don’t take it personally.
II. Cast your “capital” net wide. Different lenders
have different appetites for certain types of
credit at various times.
III. Thank the prospective capital source for their
advice and counsel, even if the feedback is a “no.”
Ask them if they know of another source that
they would refer you too.
IV. Don’t burn bridges. You may want to come back
to them in the future.
5. If you are dealing with a bank, remember these
simple facts.
I. Your relationship is important. This includes
personal accounts, personal loans and
personal investments.
II. A bank will look at your personal credit report
as an indication of your willingness to pay your
commercial debt. No matter how unfair it may
seem, be sure to pay those contested medical
and cell phone bills.
III. Bankers like to see liquidity. When they look at
your personal financial statement, it is the first
item they will look at.
IV. It is okay to negotiate, but strive to reach a
win/win solution.
Conclusion
This seems like a lot of work and it is. Even after
you create the perfect loan package, there is no
guarantee that your request will be accepted or
approved.
However, a thorough, well written loan package will
improve your chances of getting a better response.
If the initial answer is “no,” a well thought out loan
package will allow the bank or credit source to
provide you with better feedback on why the request
doesn’t fit their credit criteria. With better feedback,
you can address the issues or modify the business
plan or credit request accordingly.
Wishing you luck as you begin your search for
business capital. Please give us a call today to help
you prepare your package!
SouthStateBank.com / Member FDIC