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ProjectionHub

The Sure-Fire Way to Get a Loan for Your Small Business

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At the end of the day it all comes down to one question.  Any potential small business lender is going to ask one ultimate question that will decide the fate of your loan application.  That question is: “will we get our money back?”  There are 3 ways that a small business lender can recoup funds from a borrower, and if you can prove that you can repay the loan from at least 1 of these 3 sources, you will likely get approved for a loan.

1.  Cash Flow – The best way to secure a loan is to convince the bank that your business will produce enough positive cash flow to repay the loan.  In order to do this you are going to need to create a set of pro forma financial statements with reasonable sales and expense assumptions.  You will also need to show that you can repay the loan based on past financial statements.  If you lost $300,000 last year, you are probably going to have a hard time convincing the loan committee to approve a loan.

2.  Collateral – If the business fails, and can’t pay back the loan from cash flow, then the lender is going to come after your assets.  If you have assets that can be legitimately valued at more than your loan amount, then you are much more likely to be approved for a loan.  Different types of collateral have different levels of value in the eyes of a banker.  For example, your inventory may only be worth half of what you value it at to the bank because the bank may not know how or where to sell the inventory.  A vehicle is stronger collateral because it can be easily sold, but may not hold its value over time.  Finally, a building tends to be strongest form of collateral because it has a longer useful life, and should hold its value longer than other forms of collateral.

3.  Co-Signer – Sometimes your past financials, future financial projections, and the value of your collateral won’t be enough to make a banker feel comfortable with your loan request, so you need to bring a strong co-signer to the table.  Lenders want to see a co-signer with a strong credit score because that means they have something to lose if they don’t pay back the loan.  A co-signer with assets and a strong credit score can really solidify your loan application.

Bankers really aren’t that hard to figure out.  At the end of the day they just want their money to come back with a little bit of interest.  Bankers really don’t want to have to come after your collateral or your co-signer, so your cash flow projections are going to be vital to your success.  

20 Universities Use ProjectionHub for Entrepreneurship Courses

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Business or educationA few weeks ago we released our updated version of ProjectionHub to the world to help make the task of creating financial projections easy.  Since our team is comprised of a recent college grad, and a current college student, we decided to make the tool free for all students with a valid .edu email address.

Over the past few weeks students from 20 colleges and universities have used ProjectionHub to create up to 3 years of financial projections including a Profit and Loss, Balance Sheet and Cash Flow Projection:

  • University of Pennsylvania – Wharton School of Business
  • University of California
  • Fresno State University
  • Liberty University
  • University of North Texas
  • University of the Rockies
  • University of Waterloo
  • Ivy Tech Community College
  • King Abdullah University of Science and Technology
  • Landmark College
  • Clemson University
  • Depauw University
  • Drexel University
  • Brandeis University
  • Quinnipiac University
  • Concordia University Texas
  • University of New Hampshire
  • Southern Methodist University
  • University of St. Thomas
  • Alaska University

Thank you everyone for giving our tool a try and for all of your great feedback as we look to improve the tool over the coming months.

Top 3 Reasons Banks Will Deny Your Small Business Loan Request

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Let’s face it, these days there are hundreds of excuses that a bank could come up with to deny your loan request.  I manage a small business microloan program in Indianapolis that tends to make loans to small businesses that have already been denied by the bank.  I have heard many reasons, but there are 3 things that come up again and again.

1.  Less than 2 Full Years in Business – The banks must use data to show that after a business makes it past year 2 their chance of survival increases substantially, because almost every traditional bank I know will not lend to a business less than 2 years old.  Something to keep in mind here is that banks determine how long you have been in business by your tax returns.  So you must file your business tax return in the first year even if you don’t have much to show yet.

2.  Bad Personal Credit – Unfortunately for many business owners, your personal credit history impacts the ability to get credit as a small business.  In the early years of a small business the financial situation of the business and the business owner go hand in hand.  It takes a lot of time, and a lot of paying your bills on time to establish credit for the business that is looked at separately from your personal credit.  If you have bad credit, the best thing you can do is to use credit and pay your bills on time.  Sometimes business owners with past credit problems just tear up their credit cards.  Unfortunately you can’t increase your credit score if you never use credit.  Responsible and wise use of credit will improve your score over time, and help your small business secure bank financing.

3.  Scary Industry – It is very common for banks to have internal policies that keep them from making any loans in certain industries.  Restaurants are a good example.  Banks avoid funding new restaurants like the plague because so many fail.  I think the reason that so many restaurants and coffee shops fail is because everyone thinks they can own a restaurant.  They think, “Hey I know how to cook, I bet we could have a successful restaurant.”  What these hopeful entrepreneurs fail to realize is that the food has very little to do with your chances for success.  Just take McDonalds for example, they sell more hamburgers than any other company in the world, yet I can count 100 places to get a better burger just off the top of my head.  There are certain industries like restaurants and sometimes construction that just keep the banks running in the other direction.

These are just a few of the reasons that you will get a quick no from the bank, as I mentioned there are many more, as there seems to be an endless supply of reasons for the big banks to deny your small business loan request.

How Much Money Do You Really Need for a Startup

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I manage a microloan program at a non profit.  We make microloans to small businesses and startups for up to $50,000.  One of the biggest problems I see on a daily basis is that entrepreneurs ask for too much money for their startup.  I think it is human nature to try to be conservative, and ask for more funding than you actually need in order to give yourself some cushion, but when you really sit down and run some financial projections you may find that it actually requires very little to start a company these days.

There are 3 points that I want you to consider when you are developing your startup cost projections:

1.  You Can Start Slow – I think it is very important to note that you don’t need to start your business on day 1 at 100% capacity.  For example, you may have a great recipe for a hamburger, so you decide you want to open a burger shop.  The problem is that your startup costs for a new restaurant run up toward $200k.  How do you know that people other than your family and friends will like your signature recipe?  Before you invest $200k into a full blown restaurant, you should consider some other simple ways to test your product. Maybe you can set up shop at a fair or a conference, or maybe you could invest one tenth of the cost to get a food truck up and running first. Check out our food truck template for more information on starting a food truck business.

2.  Revenue Does Not Start on Day 1 – Believe it or not, you won’t get rich on day one.  You might make a killing on your Grand Opening, but you probably put in a few months of work before your Grand Opening.  When you think about your startup costs you need to remember that you might need to pay a few months of the following expenses before revenue starts to kick in:

  • Rent
  • Wages
  • Insurance
  • Advertising
  • Lawyer Fees
Keep this in mind as you develop your projections.

3.  Microlenders Prefer Smaller Loan Requests – Big banks prefer big loans, but microlenders are typically given an incentive to keep their average loan size as small as possible.  So it is OK to request a $5,000 loan.  You can start your business by testing the market while investing the least amount of time and resources as possible.  Here is a link to a list of all of the SBA Microlenders in the US.  Many of these microlenders will actually try to help you borrow the least amount of funding as possible to help you get to the next step.

In almost every case, you can get started with less funding than you expected.  If you have never attempted to start your own business simply because you don’t have the funding, take another hard look at how much you really need to get started.  Start small, and grow big!

You can create a full set of 3 year financial projections on ProjectionHub today.

Example Financial Projection for a Lawn Care Business and Other Seasonal Businesses

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Are you thinking of starting a lawn care business this spring?  As the manager of a microloan program, I have seen several loan applications from seasonal businesses including lawn care businesses.  The challenge for the average lawn care service is that it is a really simple business to start, but it is actually very difficult to manage cash flow to sustain the business.  So today, I wanted to use our Lawncare and Landscaping Financial Spreadsheet to create a set of 24 month financial projections for a lawn care business.  The resulting Excel template will be an excellent guide for other seasonal businesses to create a set of financial projections.  Let’s get started.

Sales Projections

First we need to start with your sales projections.  So I created Adam’s Lawn Care on ProjectionHub, and started by adding our first and only service… lawn care.

So here you can see that I am assuming we will charge $55 an hour for our service, it will take 40 days for the average customer to pay us, and finally I am assuming that all of our annual sales will occur in the 9 middle months of the year, from March to November.

Now let’s assume that you are in the commercial lawn mowing business, so you spend the winter months going from business to business signing contracts for the coming year.  Let’s assume you are able to get 50 business customers and the average customer will be charged for one hour of your service each time you mow.  Now I just need to enter in the number of hours I expect to provide each month.  To keep things simple I am going to assume that we provide service in increments of 50 hours, so in months where you only mow once, you will only provide 50 hours of service.

Before I show you how I projected sales for the first two years, I also want to assume that in year two I will be able to sign a total of 75 clients to a year long contract.

Now that we have our sales projections input, it is time to move on toward expenses.

Cost of Goods Sold for Lawn Care Business

Our next order of business is to project our cost of goods sold.  We are going to assume that you pay yourself $20 an hour and you have $3 an hour worth of fuel costs.

General Expenses

Now you need to enter your general monthly expenses which you can see vary by month just as your revenue varies by month.

Add Equipment

Next I am going to add equipment.  Let’s assume you purchase a lawnmower in month 1 for $4,000.

Cash Flow Statement

Now that we have added all of the needed info let’s check out our cash flow statement and see how the business is doing.  We are assuming that you started out with $3,000 in cash in the bank on month 1.  The only problem is that in your first month it was still winter so you did not generate any revenue.  You were able to start working in month 3, but then it takes 40 days on average to get paid by your customers, so you don’t actually receive any payment until month 4.  With the current situation you run out of cash in month 2 and have a negative cash balance for the first 6 months as seen  below:

Small Business Loan for Lawncare Company

So at this point your best option is to seek a small business loan for your company.  You may start with friends and family, and then seek out microlenders and other organizations that make small loans.  You will need about $6,000 to safely make it through your first year.  So let’s add a $6,000 loan to your projections that we assume is from your friends and family.

This solves your cash flow problem for a while, but the first year you were using your old truck and a fairly slow and limited lawnmower.  In year 2 you are going to need a used truck, a trailer, and another lawn mower.  Let’s say you are going to need to come up with another $35,000 in month 1 of your second year.  You were profitable in year 1 so you do have some cash, but is it enough. Take a look at month 1 of year 2:

As you can see you have about $30k in savings from last year’s profits in month 13, but after your purchases, you drop to a negative cash balance over $5,300.

If it was not for the seasonality of the business, your cash balance would have remained positive, but you must remember that you won’t generate any revenue during certain months of the year, and you must built that into your financial projections.

How to Project When Your Startup Will Run Out of Cash

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Cash flow is probably the most important financial metric for any startup, and the ability to predict when your company will run out of cash, even if it is 12 months into the future, is incredibly important, especially for startups that are looking to raise capital from investors or lenders.  There are a handful of factors that will impact your cash flow, and putting them altogether in a financial model is necessary for any business to determine the timing and amount of capital that is needed.  The primary factors that impact your cash flow include:

  1. Accounts Payable Terms – How many days can you wait to pay your bills?
  2. Accounts Receivable Terms – How long does it take you to collect payment for your sales?
  3. Bad Debt Expense – What percentage of your customers just won’t pay?
  4. Seasonality of the Business – Some businesses (lawn care or snow removal) make 90% of their revenue in a 3 month period of time
  5. Annual Expenses – There are certain annual expenses that can surprise you if you don’t plan well (property tax, insurance, payroll taxes)

Now the challenge is to put all these factors together to predict the exact month you will need an infusion of cash for the business.  I am going to use our ProjectionHub forecasting tool to demonstrate how this process should work:

1.  Project Sales

You will start by projecting your sales.  This isn’t simple, but you can either project sales based on your past performance, or based on competitor data.
For now I am just going to input some data into our tool for each of the first 12 months.  We will start by creating a new product and entering in some basic assumptions including the price of the produce and the Accounts Receivable Terms – this is how long it takes us to get paid.  In this example we are assuming it will take 45 days to get paid after we make the sale. data.
Now I enter in the number of units I expect to sell of “New Product #1” for each of the first 12 months as seen below:
2. Expense Projections
Next we get started with projecting our expenses.  We start by setting your Accounts Payable Terms which is how many days you take to pay your bills.

So as you can  see here we are projecting that you typically take 25 days to pay your bills, and from above we know that your customers take 45 days to pay you, so you will have some inherent cash flow challenges.

3. One Time Expenses

Now we look at those pesky one time annual expenses that tend to creep up on you.  You think you are doing well because you made a profit the first 4 months of the year, but you forgot that in month 5 you have to pay $5,000 in property taxes that will eat away all of your profits to date.  So with ProjectionHub you can enter in those one time expenses ahead of time to help you predict when you will run out of cash.

4.  Bad Debt Expenses

It is a fact of life that some customers just won’t pay.  You should come up with some percentage of sales that you don’t expect to receive payment for.  Maybe that amount is 5%.  I entered a percentage for miscellaneous expenses which includes bad debt expense and other unexpected expenses.

Now that we have entered in all of our basic sales and expense data into ProjectionHub, lets look at the resulting Excel file that the tool produces, and check our cash flow statement to see if we run out of cash.

Awesome Startup Runs Out of Cash in Month 2

So without a capital infusion our startup is already in the red in month 2, and it only gets worse from there as you can see below:

Now we need to think of plan B.  What if we could get a small loan to start the business to help with cash flow.  Let’s enter a small $15,000 business loan at 6% for 24 months starting in month 1.

Now with this infusion of cash let’s go back and check how our cash balance is doing on the spreadsheet that ProjectionHub produces for us.

You can see that we stay cash flow positive through month 7 now that we have this loan, but maybe you would like to expand your vision for the company a bit.  You are going to need to quit your day job to work on this full time, and you are going to need a salary to pay your personal expenses.  Let’s start you out with a meager $3,000 monthly salary starting in month 6.

Now there is a small problem because if you look at month 7 above you have a cash balance of $5,896, but we just added $6,000 worth of salary expenses for month 6 and 7, so you are going to end up in the red again in month 7 if you don’t raise more capital.  This time let’s think about finding an investor.  Let’s assume you are planning ahead in month 3 and see that you are going to run out of cash if you start taking a salary, so you call your rich uncle and convince him to invest $15,000 in month 5.

Finally, let’s look how this investment sets you up going forward.

Congratulations!  Look at the influx of cash between month 5 and month 6.  You are going to survive, and  your startup won’t run out of cash.  Now why don’t you take some time to play around with ProjectionHub and run various scenarios to determine if and when your startup will run out of cash.

New Financial Forecasting Tool for Business Plan Competitors

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Today we are very excited to announce that ProjectionHub 2.0 is now live, and is available for startup entrepreneurs and small business owners to use to create financial forecasts. One area that we have decided to support is business plan competitions. There are thousands of business plan competitions around the country each year, and many are hosted by universities. To help support this activity, we have made ProjectionHub free to use for any student with a .edu email address.

Simply choose one of our 3 financial projection options and use your .edu email address to sign up which will make all levels of the tool free for you. You will be able to create the following financial statements for your business plan competition:

  • Up to 3 years of projected income statement
  • Up to 3 years of projected cash flow statement
  • Up to 3 years of projected balance sheet

And of course we are always here to help, so if you need some guidance as you work through your projections, or would like us to review your projections before your competition, simply shoot us an email to support@projectionhub.com.

Financial Projection Review Service Now Available

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We are excited to announce our new financial projection review service.  We have spent the last 5 months building ProjectionHub which is a web application that helps entrepreneurs create financial projections without the need to have a PhD in spreadsheet modeling.  We started by creating a basic version of the product (major new release in the next 2 weeks), and quickly realized that we were on to something.  Small business owners without a background in finance can be completely overwhelmed when their banker or potential investor asks for a set of 3 year financial projections.  ProjectionHub is an attempt to simplify this process, so that any business owner can create their own financial projections.

Although we believe our solution is better than the alternatives, we found that many of our users still felt uncomfortable with their final projections.  You don’t want to ruin your one chance with a potential investor or banker because you didn’t take accounting in college.  So we are excited to announce our new financial projection review service that we believe will give hundreds of small business owners peace of mind before they submit their projections.

Check out our financial projection review example.  This example will give you an idea of what to expect from us.  We will review the following:

  • Is your math correct?
  • Are statements formatted correctly?
  • Are your assumptions realistic?
  • Did you leave out any expenses?
  • Your financial ratios vs. industry average
  • What questions will banks and investors ask

So whether you created your own financial projections using an Excel template, or you used ProjectionHub, you can submit your financial forecast for review, and receive a full report with our review comments, critiques, and suggestions for improvement for $49.

Shoot me an email if you have any questions at all – adam@projectionhub.com

Why is it so Hard to Start a Product Company?

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As the Client Services Manager at a technology based business incubator I have watched a number of product based startup companies launch with high ambitions only to struggle along for years because they can’t reach a sales volume that is sustainable.  I have observed 3 major struggles that most product based startups encounter, and they all revolve around “VOLUME.”

  1. Shipping Costs – I see many business owners attempt to sell their product directly to the consumer from their website.  They might do this because they think they can earn higher margins by cutting out the middle man of the retail store, or distributor.  The problem is now you have to ship each product individually to each customer.  If you sold to distributors or retail stores, you would be able to ship multiple units per shipment and drastically cut shipping costs.  Until you reach a certain volume you will get terrible deals on shipping that will probably eat away your entire profit margin.
  2. Raw Material Costs – You are looking at a similar problem with raw material costs.  There are major efficiencies to be gained when you can buy raw materials in bulk.  But until you reach a certain sales volume you probably don’t have the cash flow to support purchasing excess inventory.
  3. Outsourced vs In House Production – Lastly, you will probably feel the struggle between outsourcing production or hiring to produce the product in house.  Initially, you will probably have to outsource production because you won’t have the sales to support purchasing the building, equipment, and hiring the employees to build the product.  Eventually, it may actually become more cost effective to do some or all of the production in-house.  This can cause problems as your volume fluctuates.  You might have a busy month, hire 3 people to fulfill orders, and have to let them go the next month because sales dropped.  If/when this becomes a pattern you are going to have a hard time hiring and retaining good employees.  Your only alternative is to outsource which may reduce quality and ultimately cost you more.

Are there any other product companies out there that have overcome these challenges without millions of dollars in investment?  I would love to hear your thoughts on why it is so difficult to launch a successful product company, and understand what you have done to overcome the challenges.

How to Build Realistic Sales Projections for Your Startup

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Growing GraphStartups and early stage businesses are notorious for coming up with outlandish sales projections that they simply can’t execute.  Typically the problem revolves around building top down projections rather than bottom up projections.  What’s the difference?

Top Down Financial Projections

Top down projections take big numbers like industry sales figures, city populations, comparable business sales figures and simply guess that they can capture 1% of the market. There is no plan or data to backup the claim. The business owner simply thinks 1% of the market sounds easy enough, and uses the number as their sales projection. This is a great way to scare away every potential investor or lender.

Bottom Up Financial Projections

Bottom up projections are built around things like:

  • Website Traffic
  • Event Attendees
  • Street Traffic
  • Inbound Leads

Bottom up projections take real data from your specific situation as the base, and build upon that base.

Let’s take a coffee shop as an example. A top down sales financial projection of a coffee shop would look like this:

  • There are 100,000 people in our city
  • 15% drink coffee every day
  • The average sales amount per visit is $3
  • That means our annual market for coffee is 100,000 x 15% x $3 x 365 days = $16,425,000.
  • If we can just capture 5% of that market we will have $821,000+ in annual sales!

This is great, but it doesn’t help you understand how you will capture your first customer, let alone, your 100th customer.

A bottom up approach for a coffee shop might look like this:

  • Our coffee shop is at the intersection of the 2 busiest streets in town with daily traffic of approximately 15,000 vehicles.
  • We know that only 15% of people purchase coffee at coffee shops
  • All of them already purchase from a different coffee shop, so we will have to convert them as customers
  • Because most customers are loyal to their coffee shop we estimate we might be able to convert 10% of the total number of coffee drinkers
  • We will start by running local tv and radio commercials as well as placing c0upons in the local newspaper.
  • We think these advertising efforts will convince (15,000 vehicles x 15% coffee drinkers x 10% potential customers) 225 customers to try our coffee during the first week.
  • Because we are a local store with high quality coffee at a convenient location we believe we can convert 50% of those customers into returning customers.
  • So our first month sales we estimate at (225 customers x 50% x $3 x 30 days) = $10,000 in sales month 1.

Notice the different methods and how the second method is more realistic.  Good luck!