When you apply for an SBA Loan or other commercial loan you are often required to provide financial projections. In fact the SBA requires a 1 year pro forma income statement and narrative explanation of how you will reach your projections with an application for the following loans:
- SBA 7(a) Loans
- SBA 504 Loans
- SBA Express Loans
There are 2 core reasons that banks require pro forma financial statements in addition to the fact that the SBA requires it.
1. Ensure that You Can Make Loan Payment Based on Cash Flow – The bank does not want you to have to borrow additional funds from another source in order to make your loan payment each month. Your pro forma financials should demonstrate that you have sufficient cash flow from operations to make your loan payment. Your pro forma financial projections should also show 2 scenarios. The first scenario is your business without the loan, while the second scenario shows how your numbers change when you do take out a loan. The idea is to show positive cash flow and profits due to the use of the loan.
2. Ensure that You Understand Your Business and Industry – Your pro forma financial data should demonstrate to the lender that you know what you are talking about. If your projections are completely unrealistic and out of line with the industry, the bank is going to slap a denial on your application immediately. Do some research. If you are opening a coffee shop, and the average coffee shop has profit margins of 3%, then your projected profit margins shouldn’t be 30%.
If you can accomplish these 2 goals with your pro forma financials, you will be ahead of the game compared to many other loan applicants. You can get started created your projections right now at http://www.projectionhub.com