7 Questions to Understand Client Finance Needs

There are several reasons business clients run into cash flow problems or just simply need more money in a hurry. It’s better to get in front of this problem sooner than later and as their accountant, you need to be able to ask the tough questions.

Seven Questions Where Your Client Will Need Answers

Business owners, especially startups, can be excessively optimistic and not properly plan for the aforementioned scenarios. They are simply convinced their idea will take off. Here are seven questions to ask clients in order to better understand their finance needs.

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1. Why is Your Business Going to Succeed?

Answering this question requires a robust business plan. What is the opportunity you have spotted in the market, the need that’s currently unmet? Who is your competition? Are any the dominant player with the majority of the market share? How long will it take for your business to become operational? Do you have a seasoned management team onboard? If not, how will you find them? What is the expected return on equity once your business is fully operational? You need to have a document along with a presentation that makes your case. 

2. How Much Money Will You (Realistically) Need?

This should be followed by “How did you arrive at that number?” You want them to walk you through their business plan. They often need exponentially more money as the business ramps up operations. Where will this money come from? Is it from product sales? How have they matched projected sales revenue with the more predictable outflow for expenses?

Remind them of the timeless advice people are given when going on vacation: “Bring twice as much money as you think you will need.” That was back when people carried cash. Today the advice would be “Be prepared to spend twice as much as you anticipated in out of pocket costs.”

3. Are You Prepared for Contingencies?

How will they be addressed? When you embark on a construction project such as building a new home, the architect typically builds in a cushion of 10 percent (or more) into the project budget. Why? Because you don’t know what problems you will encounter along the way.

If construction is halted, rent still must be paid on equipment. The mortgage needs to be paid. When renovating an older home, contractors usually protect themselves by saying: “We don’t know what we will find when we open up the walls.” Assume everything will not go according to plan, what cushion has the business owner built in?

4. Are You Borrowing or Taking on Investors Who Will Own Equity?

The answer might be “Yes” to both options. If you are borrowing, you need that robust business plan that will persuade the bank your venture is a good risk.

If you are bringing on investors who will pay to own a slice of your equity, they need to be confident the projected return on investment is sufficient to balance the risk they are accepting. Their investment will likely be illiquid for a long time. What can they expect as a return on investment?

When should they be starting to see a return? Regardless if it’s a loan or equity, you will need that good business plan.

5. How Much Equity Are You Prepared to Give Away?

It’s been said early money is the most expensive money. If investors are willing to put money into a startup, they are buying into a vision and the business owner who promises to deliver. They are taking a major risk. They want to be adequately compensated. You want to retain control of your business, but you must be prepared to part with enough equity to make the risk worthwhile to the investor.

6. How Much of Your Own Money Are You Putting at Risk? 

How much are immediate family members investing in your business? If a bank lends you money, they want to be lending alongside you.

They want you to have “skin in the game.” If a business runs into serious financial trouble, lenders have standing ahead of equity investors. They want you to have a substantial amount of your own money at risk, so you are motivated to see your business succeed.

7. How Much Are You Prepared to Pay to Borrow Money?

Your return on equity must far exceed the cost of borrowing money. Imagine the following scenario: You are confident your business can return 20 percent, yet the only lender you can find wants 35 percent interest and your personal guarantee of the loan, you shouldn’t be starting or expanding your business at this time.

Bear in mind there are costs besides the posted interest rate. Origination fees are a good example. Your interest rate will likely be variable, which is dangerous in a rising interest rate environment.

Final Thoughts

Ideas can look great on paper. Things get complicated once loans are negotiated and your client signs documents. They need to be aware of the risks they are assuming along with costs and consequences.

Accounting professionals that are looking to offer financing application support for small business clients are invited to download ForwardAI’s latest guide on How Lenders View Financing Applications. Learn how to review your clients’ General Ledger with the mindset of a lender and help them position their business for success. Download it here.