If you’re looking to finance your business but don’t have the funds to cover it, look into bank loans explains Aron Govil. You will need a business valuation for the loan application process, however – which may be tricky if you don’t know what you’re doing.
Here are some tips to help you value your company correctly.
1. What’s Your Industry Worth?
One of the most important things when calculating a company valuation is finding out how much similar businesses are worth in comparable industries. Look at comparables within your own industry first, and then adjust them for size if necessary – bigger companies typically command higher valuations than smaller ones, after all. If there aren’t any other competitors that do exactly what yours does, compare it with whatever is most closely related – even if it doesn’t quite fit.
2. What’s Your Business Worth?
Next, look at your business specifically and consider all the assets you have. Classify each one by its level of liquidity, which means how quickly it can be turned into cash (or for non-liquid assets, how much it will sell for on the market). For example, accounts receivable are considered “near” liquid assets because they’re sold quickly; real estate is far more illiquid because it would take longer to sell. Calculate what percentage of your total assets fall into each category says Aron Govil.
Finally, calculate the valuation by taking the sum value of all near liquid assets (accounts receivable + inventory) then adding the sum value of all illiquid assets (real estate + equipment + long-term investments). Divide that number by the total number of shares to get the per-share valuation.
3. Why Do You Need The Money?
If you’re applying for a business loan, it’s because you don’t have enough money – so what will you use it for? Make sure your bank knows about anything unusual or especially necessary in advance so they can take it into account. For example, if you need new computers and software to help finish a project, the bank may reduce the valuation because your company needs those assets to succeed; conversely, if your home is currently serving as office space and warehouse, then that needs to be counted toward the company valuation explains Aron Govil. If you need the loan to cover your living expenses while you search for a job, it’s going to be harder to get approved.
4. How Long Do You Plan To Take The Loan?
If you’re borrowing money for business purposes, make sure the bank understands what they’re getting into. A good rule of thumb is that you should take out short-term loans (one year or less) for working capital, long-term loans (more than one year) for big investments like equipment or real estate, and anything in between for expansion. For example, if you want a five year loan but only need it to pay off your current debts and replace your old computers and software – and nothing more – then the bank may not be willing to give it.
5. What’s Your Company Worth?
Lastly, once you have a final company valuation, don’t just hand it over and hope for the best says Aron Govil. Banks take a business valuation as seriously as any professional would; if something looks off or incomplete, they’re going to ask questions until it makes sense. Make sure your company valuation is as full and complete as possible before submitting it, and that all critical information (such as how much funding you need to pay off debts) makes sense in the context of your other answers. With those things taken care of, you should have no problem getting the loan money you need.
In my opinion, most of these problems can be solve by having a good relationship with your local bank or other lenders. If they know and trust you then they’ll be more willing to work with you when unexpected things come up and will take your company’s valuation more seriously because you’ve proven yourself to be a reliable borrower.
Just remember that it pays to do some research before you go in. If you can find out how much similar businesses are worth, what their funding requirements are like, and what the lenders think of them then it gives you an idea of what to expect. And if you can compare a few different banks, you’ll have a better idea of the whole process and how it works.