Feasibility before financing
A lender will test your new venture with a predictable set of questions. Answer them yourself first, while changing the plan is still cheap.
Many founders approach a lender to find out whether their venture will work. That is the wrong order. A lender is not there to test your idea for you, and a declined application is an expensive way to learn what a feasibility study would have shown.
The questions a lender asks are predictable. They are also the right questions for you to ask of your own venture. The difference is timing. Answer them early and you can still change the plan. Answer them in a lender’s office and you can only defend it.
What a lender is weighing
The Business Development Bank of Canada describes how financial institutions review a business loan application using the five Cs of credit:
- Character: your credibility as a borrower, including your credit history and your experience.
- Capital: how much of your own money you are putting into the project.
- Capacity: your income, expenses, and existing debt.
- Collateral: assets the lender can turn to if the loan is not repaid.
- Conditions: the terms of the loan, and the state of the economy and your industry.
Underneath all five sits one concern: whether the business will generate enough cash to repay the debt. BDC notes that some lenders, itself included, base business loans on cash flow, looking at revenues, expenses, and profit.
For a new venture with no trading history, the lender cannot look at past results. It has to judge the plan. BDC’s guidance on start-up loans says bankers need to understand your business model, want to see realistic financial projections for the next 18 to 24 months, and expect research and data showing that your projections and assumptions are realistic. They also want to see that you are sharing the risk with your own money, and that the person running the business can do it.
The questions behind the questions
Translate that into plain questions and you have the outline of a feasibility study.
Who will buy, and why from you? A market exists when specific customers have a need, a budget, and a reason to choose you over the alternatives. Describe them precisely. Show how you know.
What will it cost to open the doors? List every start-up cost: premises, fit-out, equipment, licences, inventory, hiring, and the working capital to carry the business until revenue arrives. Show how each loan dollar would be used.
When does cash turn positive, and what carries the business until then? A monthly cash-flow forecast answers this. It also shows the lowest point your bank balance will reach, which is the number most founders underestimate.
How much of your own money is at risk? Lenders read your contribution as a measure of conviction. Know the figure and where it comes from before you are asked.
Who runs it, and what have they done before? Relevant experience reduces risk in a lender’s eyes. Gaps are not fatal if you show how they will be filled.
What happens if it goes more slowly? Run the forecast again with slower sales and higher costs. If the venture only works when every assumption holds, the lender will notice.
Why answering first saves money
The cheapest moment to change a venture is before you commit to it. Once a lease is signed, equipment is ordered, or staff are hired, every change in the plan costs real money. A feasibility study done before those commitments can tell you to change the scale, phase the launch, choose a different site, or stop. Each of those outcomes is cheaper on paper than in practice.
It also changes your conversation with lenders. BDC lists a set of documents lenders ask for, including financial statements, financial projections, how you will use the loan, and your marketing and production plans. Its guidance on business plans warns against assumptions that are not clearly broken down and against arguments made without supporting evidence, and it names feasibility studies, surveys, and market analyses as the kind of support a plan needs. A founder who arrives with that work done is answering the lender’s questions before they are asked.
The cheapest moment to change a venture is before you commit to it.
Consider an illustrative case. Say a founder plans a new service business and approaches a lender with a strong idea and a single page of projections. The lender asks how the revenue figures were derived, what the monthly cash low point will be, and how much the founder is contributing. Each answer requires research the founder has not yet done. The application stalls, and the founder pays to do the work anyway, now under time pressure. The same research, done first, would have cost the same and left the founder in control of the timing.
A government-backed loan does not remove the test
Some founders assume a government program makes the lender’s questions less important. It does not. The Canada Small Business Financing Program makes it easier for small businesses to get loans by sharing the risk with lenders, but the program’s own guidance is clear that financial institutions are solely responsible for deciding whether to approve a loan, and that they must apply the same care and procedures as they would to conventional loans of similar amounts. If one lender declines, the program suggests trying another, since lenders have different criteria.
A program can improve the terms available. It does not change what a lender needs to see.
A feasibility study can say no
The honest purpose of a feasibility study is to find out, before money is committed, whether the venture can stand on its own numbers. Sometimes the answer is yes. Sometimes it is yes with a smaller start, a longer runway, or more capital. Occasionally it is no.
Each of those answers is worth having. The last one is worth the most, because it arrives before the lease, the loan, and the personal guarantee.
Sources
- “How to get a business loan even with a bad credit score”, Business Development Bank of Canada. https://www.bdc.ca/en/articles-tools/money-finance/get-financing/find-financing-poor-credit
- “How research can help you get a start-up business loan”, Business Development Bank of Canada. https://www.bdc.ca/en/articles-tools/start-buy-business/start-business/get-startup-business-loan
- “How to get a business loan in Canada”, Business Development Bank of Canada. https://www.bdc.ca/en/articles-tools/money-finance/get-financing/how-to-get-business-loan-canada
- “Mistakes to avoid when building your business plan”, Business Development Bank of Canada. https://www.bdc.ca/en/articles-tools/start-buy-business/start-business/business-plan-how-avoid-common-mistakes
- “How a bank looks at your business”, Business Development Bank of Canada. https://www.bdc.ca/en/articles-tools/money-finance/get-financing/how-a-bank-looks-at-your-business
- “Frequently asked questions: For small businesses”, Canada Small Business Financing Program, Innovation, Science and Economic Development Canada. https://ised-isde.canada.ca/site/canada-small-business-financing-program/en/small-businesses/frequently-asked-questions-small-businesses
- “Helping small businesses get loans”, Canada Small Business Financing Program, Innovation, Science and Economic Development Canada. https://ised-isde.canada.ca/site/canada-small-business-financing-program/en/find-loan-your-small-business/helping-small-businesses-get-loans
