All businesses, whether they are just starting or they have been operating for some time, will ask themselves, “Do I need a Business Loan.” For those trying to get their first business loan, the process can seem daunting, or, they think it’s as easy as going to your local Bank or Credit Union and applying for one.
Getting a loan is not an easy process. Bank loans require a great deal of paperwork. This can include:
- Business Plan
- Business Financial Statements
- Projections for your cash flow for the next 12-months, or more
- Some type of Guarantee from you and any other owners of the business
Also, something to consider is that your personal credit history and if it exists, the3 credit history of your business. If your personal credit history is not good this may not, in and of itself keep you from getting a loan. Nor will your business credit history. However, having both of these in good standing will certainly make the process easier.
Banks and Credit Unions commonly use what is called the 5 C’s. These are:
- Character: a good management team, realizing that even someone with a blemish that has done all they can to stay current with their obligations, could possibly be a good lending customer.
- Credit Score: Often this is an all or nothing. While lenders all have different requirements, they generally won’t go below what that requirement is. However, this may be where Character can make up for an otherwise low score.
- Capacity: This is all about how much money your business makes. Lenders will not give a loan to someone who does not have the ability repay it. This includes start-ups and early in their existence businesses who have not yet started making any money. The harsh reality here is that these are not good lending risks and the ability to obtain a loan is minimal at best.
- Capital: Having some cash on hand for daily cash flow and a little extra if your receivables aren’t coming in as fast as you’d like tells the lender the business loan you’re looking for isn’t an act of desperation you are trying to do to keep your business going.
- Collateral: Assets like real estate or capital equipment are collateral. Lenders are not necessarily in the business of repossessing your property and selling it to recover the loan, but they want to know it is there. A word of caution: I have had clients who have used their homes as collateral. I do not recommend this.
Once again, this is not the only criteria the Bank or Credit Union will evaluate for a loan. However, having all of them may make a huge difference.
Now you are probably thinking that I’ve just said getting a loan is impossible for you. Understand I am not a Business Lender. I only help businesses become “bankable”. That means I help them develop a business that a Lender would be willing to lend money to. That involves developing a stable and sustainable business with sufficient cash flow to meet all of their business requirements AND repay the loan. Let us be honest, you wouldn’t lend money to someone who doesn’t have the means to repay it and the bank won’t either.
Understanding what you the business owner can do to improve these factors and then executing a plan to improve them is critical to becoming bankable. While not a guarantee of a loan the improvement will, at a minimum, improve the health and sustainability of your business. Improving your cash flow takes a few simple steps:
- Enforce the terms of payment for your business.
- Stretch out your own payables. .
- Take advantage of discounts offered for early no penalty payments.
- Evaluate your pricing. Is your pricing reflective of your full value stream, which includes your profit?
- Manage your inventory. Just because you can buy in bulk at a discount doesn’t necessarily make it a good purchase. Inventory ties up a lot of cash and some inventory becomes damaged or spoils while you hold it. Managing your inventory more tightly helps ensure your cash availability.
As you can see, this requires a level of knowledge about your business you may not be comfortable with. Yet, knowing the overall financial performance of your business now and how you project it will be in the future, is a key step in becoming bankable. I can say from experience that this is the most challenging part of my working with my clients. We keep it simple and ultimately most get it; but stereotypically people don’t like the math of finance.
Understanding your total business takes effort and the process can be learned if you use the right resources. Someone skilled and experienced with small business is a great resource. You want to learn every aspect of your business and with the right resource, you can do this simply and without a degree in accounting.
Bankability is a critical step for a business even if you are presently fortunate enough to not need a business loan. Things do happen and you never know when obtaining a loan from Lender will be necessary. Being ready when the time comes is a crucial and business saving effort.