What’s that old saying? “It takes money to make money”? Yeah, well that might as well be a law when it comes to growing your small business. If you really believe in the success of your business and want to scale it exponentially in a shorter period of time and of course if the numbers support it, an influx of capital is a great solution for you. But if you have had any experience trying to get a loan at all, you know the experience is about as enjoyable as stubbing your toe. Here are some tips that will better prepare you to get a small business loan:
Tip #1 Demonstrate that your business produces steady cash flow
A lender is going to find it hard to justify giving you a significant loan if your business can’t demonstrate positive cash flow. Cash is king and it also indicates your business’s current health and predicts it’s future. Demonstrating this will show the lender that you are able to pay creditors, employees, and other business related expenses on time and in full. Also, it is good to make sure and communicate where future cash will continue to come from. If you have a lot of unpaid balances in your accounts receivable that will be valuable to communicate to your lender. Be prepared to show financial statements like balance sheets, tax returns and banks statements to your lender which will give them a historical idea of how your business has been performing. If you have significant drops in cashflow you should prepare to be asked why and develop a response in advance.
Tip#2 Keep your debt load manageable
Your debt load is what is carried as debt on your balance sheet. This could be credit card debt, debt on a company vehicle or any other accounts payable or loans that your business has. You need to be able to demonstrate that you can continue paying on all of your current debt obligations in addition to the additional debt you are applying for. In fact, you want to show the lender exactly how their loan will benefit to your business. Demonstrate how the added liquidity will be used, and forecast the additional revenue that will be received as a result of the infusion of cash. How you plan to use the funds is important information to most lenders.
In regards to this, it is also important that you show a consistent payment history on your debts and that you pay them on time. The lender will most likely pull a credit report on your business and/or your personal credit report. Make sure and clear any mixups on your credit report to up your creditworthiness.
Storytime – When I was 18 or so, the need to check my credit score for the first time came and it was ridiculously low! I want to say it was mid 500s. I didn’t have any credit cards at the time and hadn’t done much to build up my score yet…but this low number blew me away. After some investigation, I found out I had been taken to collections over a $25 Sean of the Dead DVD rental I had forgotten to return. I had moved a couple times and the notifications had never reached me. How embarrassing.
Tip #3 Have a solid business plan (prove you are a capable business owner)
Although it is a significant investment of time and energy to draft this document, this is the opportunity for the lender to see your vision, your potential for growth, and how your business is currently performing in relation to your plan. You are ahead of the game if you can get your lender on board with your vision and the future value you plan to bring to your community. This is especially powerful if dealing with a local lender.
There are several aspect to creating a business plan but the gist of it is outlining where you have been, where you are, where you want to go, what the potential challenges will be and the solutions to those challenges. Although it is not only about the financials, be sure to include historical information and realistic projections with all assumptions…we are still talking about cash here…numbers are going to be more important than words. It is also a great idea to present two versions of your business plan – a forecast on how you expect your business to perform if you don’t get approved for financing, and forecast on how it will perform if you do. Again, this is a tremendous opportunity to sell your competency as a business owner and the vision of your business.
A great tool for creating a business plan is LivePlan.com. My business partners and I have used LivePlan multiple times to create killer business plans that have raised over 100k in investor startup capital.
Tip#4 Shop for multiple lenders
Lenders are not all created equal. You should gather a list of your top five options and start at the top, or start a couple simultaneously. In some cases, you might even be able to pit them against each other to get the best terms. Another important tip is to look for local lenders as they will be more understanding of how your business fits into the local business environment and the kind of value and success you can achieve.