Do Banks Really Care About Your Financial Projections?
When a banker is looking at a loan application how important are your financial projections to them? Unfortunately, not as important as your ability to repay the loan!
Most bankers will assume that your projected financials are false, and come up with their own methods and assumptions for predicting future financials. Rather than look at your financial pro forma, bankers are going to look at 3 other financial areas that relate to your ability to secure a loan.
1. Past Cash Flow - At the end of the day the bank wants to know that your business is going to generate enough cash flow to make the monthly loan payment. The best way to determine this is by your past financials, not your projections. If your monthly loan payment will be $800, and your business generates $2,600 in positive cash flow in the average month, then you are in good shape to be able to take on this new debt.
2. Personal Finances - Banks want to make sure your personal finances are in order. Do you have another source of income to provide for your family? That way if the business has a bad month you won’t have to decide between taking a paycheck to put food on the table and making your monthly loan payment. Lenders want to make sure that your Global Cash Flow picture looks good which includes both personal and business finances.
3. Use of Loan - Finally, your banker is going to look carefully at how you intend to use the loan. In general the loan needs to pay for itself. So either the loan helps you increase revenue by more than the monthly payment, or it helps you increase efficiency and decrease expenses by more than the monthly loan payment. If the loan use does not increase sales or decrease expenses, the finances just don’t make much sense from a banker’s point of view.
Financial projections are incredibly important for you to understand, they help you manage cash flow, determine the potential of the business, and may attract potential investors, but when it comes to your loan application they just don’t matter as much. If your past cash flow from the business, personal finances, and the use of the loan funds all make sense financially, then you are much more likely to be approved than if you only had an exciting set of projections.