Knowhow: Focused On Financing
Small business owners looking for access to additional capital can take comfort in knowing that they are not alone. In a tough economic environment like this, more and more companies are seeing their profit numbers dip and their levels of debt rise. To stay competitive, those small businesses are trying to find new sources of revenue.
Fortunately, there are numerous ways in which a business owner can find new sources of financing, but perhaps the most tried-and-true method involves the traditional bank loan.
While it may serve as a common experience for many small business owners, approaching a bank for a business loan is more demanding now than it was ever before. The process has not changed, but expectations have, and the small business owner caught unprepared will also find him or herself out of luck.
Timing Is Everything
The best time to ask a banker for money is before you need it and when your financial position is still strong. Coming in at this time shows the bank that you have a handle on your business and are planning ahead.
Conversely, the worst time to ask for money is at the time when you actually need it. The banker will take into consideration the fact that you have not planned in advance, and that will hurt you in the loan process. If you approach a bank with a request for money that you need next week, you’re not going to get it.
Under Review
Keep in mind that in this economy, banks are being much more cautious than they used to be. They’ve always exercised caution with small businesses and now that’s even more prevalent. That’s not to say that there isn’t money available. There is. But the small business owner that’s looking for it is going to have to do more to earn it.
For starters, know your credit score and be sure to discuss it with your banker. The first thing a banker is going to do is run a credit report and look at your score. Because banks are exercising greater caution, they are demanding an even higher score than in the past.
Your credit score isn’t the only thing the banker will be scrutinizing. A banker is also going to take a look at your character as a way to determine if you can, in fact, run your business in an effective and profitable manner. With that comes the issue of cash flow: you’ll need to prove that you can pay all of your bills, pay yourself a reasonable salary and — most importantly — pay back the bank.
Be prepared that there is no such thing as too much collateral for a banker. You will be asked for personal guarantees and the bank likely will take seconds on your house and other assets. You may even be asked for a co-signer.
Come Prepared
The most important thing to remember when approaching your bank is you must come prepared.
You need to have a clear understanding of how much money you are borrowing and what you are going to use it for. When a banker asks you how much you need and why you need it, you better have a good answer.
And have a solid loan package put together before you arrive.
Having an organized plan and a detailed package to present will make a good first impression. Make sure you include a business plan, financial projections to show you can repay the loan, current financial statements of the business, a personal financial statement and two or three years of business and personal tax returns.
John Rainey is a senior business advisor and financial specialist with the Massachusetts Small Business Development Network at Clark University. He can be reached at jrainey@clarku.edu.
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