Any entrepreneur, emerging business owner and franchise owner will tell you – financing a business is no small undertaking. Pulling funds from personal bank accounts, liquidating assets, talking to friends and relatives about your venture — these are all actions you might take to get your dream business up and running. Banks, lenders, and other financial institutions often also play a role.
In fact, for many small businesses, some form of debt is essential to carry own business operations and to grow. According to a recent study by the Harvard Business School, about 48 percent of business owners reported a major bank as their primary financing relationship. Another 34 percent identified a regional or community bank as their main capital financing partner.
Understanding the following factors — fundamentals that loan officers scrutinize — could increase your chances of getting a small business loan:
Lenders want assurance that your business will pay back the loan without fail. Your job? Convincing them that your company won’t default. Calculate cash flow at least quarterly and try to optimize those numbers before applying for the loan. Understand the support for your financial statements and be able to defend any projections.
Associate Partner Rich Middleton points out that “Operating cash flow does not include personal funds advanced to the business. In addition, the bank may require that personal loans to the business are held subordinate to their loan.”
This is the asset or group of assets a lender can recover to offset loan losses. In the case of a mortgage, it’s the market value of the property underlying a home loan. To bolster your case to a loan officer, consider getting independent appraisals of major assets to be used as collateral. Those assets might include inventory or company-owned real estate.
Adds Rich, “Typically with a credit line, the lender will collateralize the debt with your receivables and/or inventory. Quite often you will be asked to provide a personal guarantee on the loan.”
Any competent loan officer will examine your credit history before approving a loan. Sometimes otherwise strong businesses face financial troubles due to problems beyond the owner’s control. But know that if your credit is less than stellar, banks may be reluctant to lend. So plan early and make every effort to fortify your credit report. Paying off old loans or renegotiating supplier contracts may lift your credit score and increase the likelihood of loan approval.
Lenders want assurance that you’re serious about the future of your business. Let the bank know that you’re seeking financial guidance from your accountant and other knowledgeable advisors.
“The relationship with your accountant can’t be overstate,” emphasizes Rich. “It will give credibility to the tax returns and financials provided to the lender.”
Manager Chris Cicalese agrees: “Prior to contacting a bank about a small business loan, it is best to talk to your CPA and go over your financials to see what kind of shape they are in. This could give you the opportunity to make the necessary changes well in advance so that when the bank requests your records you can provide them promptly.”
Don’t let the lending process scare you. Set up a meeting with your CPA or business advisor to discuss your business goals and together you can collaborate on a plan that best fits your unique circumstances.
Contact us for additional guidance.
© MC 2017 | “Business Tips” are published monthly to provide useful business information. The business information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
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