As the manager of an SBA Microloan program serving startups and small businesses in the Midwest, I get to see a number of “interesting” loan applications. The quality of the business, the business owner, and the loan application proposal vary greatly between applicants, but one aspect of the loan application that is always a problem is the business financial projections. It is incredibly difficult for an entrepreneur with no accounting or finance background to complete a set of financial projections on their own, so the solution that most loan officers try to use is an excel spreadsheet template that they give to every loan applicant to complete.
So far so good right? The problem is that the template is returned, completed, but undoubtedly has some pretty strange projections.
A million in sales in year 1?
Your cost of goods sold is only 5%?
You are going to start by hiring 7 people before you have any sales?
As a loan officer, my biggest pet peeve is a set of financial projections without a written narrative included. Any given set of projections will probably have dozens of assumptions, but typically business owners do not include their assumptions with their projections.
A potential lender needs to be able to review your assumptions and make their own determination as to whether or not you might be able to achieve those goals. Additionally, lenders will want to poke and prod your assumptions to see how changing something like the price of gas will impact your bottom line.
So PLEASE make sure to include a narrative of your assumptions when you create a set of financial projections.