7 Steps to Create a Financial Projection Before Applying for a Business Loan

When applying for a business loan, having well-prepared financial forecasting can assist in fast approval. Financial planning and forecasting is a crucial document to be presented that proves your company’s potential for growth and sustainability to lenders while enhancing your eligibility for business loans. By carefully anticipating your organisation’s future economic success, you provide lenders with the road map for how you intend to repay the acquired loan for business. Let us understand financial forecasting meaning, financial forecasting methods before applying for a business loan, its importance in the eyes of creditors, and how to well prepare your required business loan documents to accelerate the loan application process.

Why Lenders Care About Financial Projections?

Lenders emphasise financial forecasting as it provides insight into an organisation’s future financial soundness. A financial planning and forecasting document showcase a thorough assessment of your predicted sales, costs, and earnings for a given period of time. This projections allows lenders to assess your company’s capacity to produce enough cash flow to cover your line of credit loan obligations. It also helps them comprehend the risks of lending to your organisation.

With a meticulously prepared document, you can quickly acquire a collateral free business loan with desired repayment tenure. Lenders utilise financial forecasting to assess the accuracy and dependability of your financial standing or repayment. They want to see if you have a realistic grasp of your market, the demand for your products or services, and the expenses associated with running your enterprise as a business loan without collateral poses a bigger risk to the lender.

FlexiLoans is one such fintech organisation that provides online business loans collateral-free. You can get quick business loan in a complete digital process with a limited credit history and minimal paperwork, eliminating the challenges of traditional business loans.

How to Create Financial Projections?

Creating accurate financial forecasting requires multiple essential steps as well as the grasp of solid financial forecasting methods. Before chalking out your projections, you must carefully assess financial forecasting techniques to construct projections that precisely inform lenders of your growth plans and your business loan eligibility. Follow these 7 steps to generate projections:

Step 1: Collect Historical Data: First gather the data of previous fiscal years. If your organisation is new, research and consider industry standards to predict prospective revenue. Historical data contains previous income, costs, profits, and losses. This information serves as the basis for your financial forecasting.

Step 2: Select a Financial Forecasting Method: By understanding financial forecasting meaning, you will be easily able to select the suitable financial forecasting technique. It must include both qualitative and quantitative approaches, expert judgement and time series analysis. The approach you use is determined by your company strategy, industry, and the availability of data. For example, time series analysis is effective for organisations with consistent past performance while regression analysis can help predict future sales based on external factors.

Step 3: Project Revenue: Predict your future revenue using past data and market analysis. Consider market trends, competition, price tactics, and prospective expansion prospects. Your revenue estimates should be reasonable and supported by evidence. Estimating future income is one of the most important aspects of your revenue predictions. To make reasonable financial planning and forecasting estimates, consider the factors of sales forecasting, market trends and sales channels (e.g., internet, retail, wholesale).

Step 4: Estimate Costs and Expenses: Determine all areas that require upfront costs in running your organisation, both fixed and variable. Fixed costs include rent and salary, but variable costs include raw materials and marketing charges. Ensure to include in any prospective cost increases due to inflation or business development. Estimate your employees’ salary and compensation, including perks and payroll taxes. Include the expenditures of maintaining equipment, buildings, and vehicles.

Step 5: Conduct Sensitivity Analysis: Sensitivity analysis is changing financial forecasting based on several factors. For instance, you may develop best-case, worst-case, and most likely scenarios to better understand how changes in revenue, expenses, or market circumstances can affect your organisation. This analysis enables you and your lenders to better understand the possible risks and benefits.

Step 6: Financial Statements: Prepare projected financial statements, such as the income statement, cash flow statement, and balance sheet. These statements give a complete picture of your organisation’s financial health. The income statements display your predicted revenue and costs, the cash flow statement measures the inflow and outflow of cash, and the balance sheet reveals your assets, liabilities, and equity.

Step 7: Review and Refine: Once your financial forecasting is finished, check it for accuracy and consistency. Seek input from financial experts or industry experts to incorporate required changes. Your projections should be precise, thorough, and in line with your business objectives so you can acquire desired term loans for your business.

How to Present Financial Projections?

It is equally crucial to successfully present your financial forecasting as it is to prepare them when you apply for business loans. Consider the following tips:

• Use Visual Representation: Visuals like charts, graphs, and tables help lenders comprehend your financial planning and forecasting better. Utilise these tools to emphasise important numbers like predicted sales, profit margins, and cash flow. Make sure the graphics are clear, well-labelled, and easy to comprehend.
• Provide a Narrative Explanation: While images are crucial, they should be supplemented with narrative explanations. Describe how you arrived at your estimations, including the assumptions you employed and the reasoning behind your projections. This helps lenders apprehend the context of your figures and boosts trust in your predictions.
• Highlight Key Metrics: Always pay emphasis on the critical metrics in your financial forecasting, such as cash flow estimates, debt service coverage ratio (DSCR), and profitability ratio. These measures reflect your capacity to create cash flow, pay back the loan, and maintain long-term growth.
• Organise Your Presentation Logically: Structure your presentation rationally, beginning with an overview of your company and its financial health, followed by comprehensive predictions, sensitivity analysis, and a conclusion. This structure ensures that lenders readily understand your thought process and important takeaways.

How to Explain Financial Projections?

When discussing your monetary health with lenders, you must be thorough with your prepared financial planning and forecasting. Here’s how to clearly explain your projections:

• Be Transparent About Assumptions: Clearly describe the assumptions that underpin your financial forecasting. Lenders like to know the elements you’ve examined, such as market expansion, price plans, and operating expenses. Being open about your assumptions demonstrates that you have thought critically about your organisation’s future.
• Discuss the Potential Risks and Mitigation Strategies: Acknowledge any risks to your financial forecasting and explain how you intend to address them. For example, if you anticipate considerable sales growth, outline how you will handle greater demand or competition. Addressing risks proactively shows that you are prepared for a variety of circumstances and boosts your eligibility for business loan.
• Prepare for Questions: Lenders may enquire about particular data, assumptions, or financial forecasting methods used in your estimates. Prepare to explain your forecasts in-depth and back them up with statistics. This level of readiness further deepens your reliability in managing and repaying the business loan.
• Maintain Focus on Key Metrics: When describing your financial forecasting, focus on the primary variables. Emphasise how your company aims to produce cash flow, become profitable, and maintain financial stability. Keeping the discussion focused on these KPIs allows lenders to understand the wider picture and accelerate the loan process.

Conclusion

Preparing financial planning and forecasting before you apply for business loan is quite an important step in the application process. Financial forecasting gives lenders a comprehensive blueprint of your company’s future financial health, which helps them determine your capacity to repay the business loan. You can generate accurate and compelling financial forecasting by including obtaining historical data, selecting the appropriate financial forecasting methods, predicting income and costs, and generating financial statements to acquire desired loan for business. Furthermore, successfully presenting and explaining your estimates will considerably improve your chances of obtaining the capital you require to expand your organisation.

FAQs

1. What is financial forecasting? How is it done?
   Financial forecasting is the practice of estimating a company’s future financial performance using previous financial year’s data, market trends, and other pertinent information.
2. Why is financial forecasting necessary for business loans?
   Financial forecasting is critical for company loans since it allows lenders to analyse the borrower’s ability to repay the loan while also understanding the possible hazards.
3. What are some popular financial forecasting techniques?
   Common financial forecasting methods include time series analysis, regression analysis, and qualitative techniques such as expert review.
4. Which assumptions should I include in my financial forecasting?
   Explain the market growth, pricing strategies, operating expenses, and other variables influencing your estimates.
5. How can I reduce risk in my financial forecasting?
   Reduce risks by creating contingency plans, updating projections for various situations, and displaying a thorough awareness of potential issues.
6. How frequently should I update my financial forecasting?
   Financial estimates should be revised regularly, particularly when there are substantial changes in your organisation or the market. Regular updates keep your forecasts accurate and competitive.
7. What should be included in my financial planning and forecasting for a loan for business application? Financial projections should include estimated income statements, cash flow statements, balance sheets, and key metrics like cash flow and profitability ratios.