It’s safe to say that businesses rely on capital to fuel growth and fund other initiatives. This is true whether you’re a startup bootstrapping the early months of your young business, a growing company looking to fund new initiatives, or your business occasionally needs capital to bridge a seasonal gap in cash flow. Some businesses might turn to an investor, but for most small businesses owners, it will likely be a small business loan.
The more prepared you are before you sit across the desk from a loan officer, speak to someone on the phone, or fill out an online application, the more confident you’ll be—and the more likely you’ll find the loan you’re looking for. Here are five keys that will help make your search for borrowed capital more strategic:
Take the time to identify what you need the money for and how much you really need. Regardless of whether or not the loan officer asks, this will help you determine the loan terms that make sense, the total cost of the loan you can afford, and how quickly you need the money.
Climbers at Everest Base Camp all know what they’re there for—to summit the highest peak in the world. They all start with a clearly defined objective. The stakes are too high to aimlessly wander around. Combined with a strategic plan, the right tools, the proper fitness, and the knowledge required to summit, their odds of success greatly increase. This is also true if you’re borrowing capital to help your business grow and thrive.
An honest evaluation of where you and your business are today compared to where you need to be to qualify for a loan is a critical strategic step that can’t be ignored. Your business credit profile, personal credit, your time in business, and the overall health of your business will likely impact your odds of success and where it makes the most sense to look.
Traditional lenders, like the bank, are typically looking for a credit score in the 700’s (680 is usually the bottom threshold), collateral, and a track record of several years that demonstrates you are a good borrower. Fortunately, if you don’t meet the criteria, it doesn’t mean you won’t find success outside the bank. Many online lenders will work with a business owner who doesn’t meet the stringent criteria required by the bank if they’ve been in business for at least a year and can demonstrate they have a healthy business.
Most business owners visit the local bank when they need a small business loan. It makes a lot of sense. They have a relationship there and their banker tells them that relationship is important. Unfortunately, if your business doesn’t meet the qualification criteria, that relationship isn’t likely going to help get them a loan. Banks and credit unions can be a good option for some borrowers, but crowdfunding, non-profit micro-lenders, and online business loans can also be good options depending upon you and your business’ situation. Don’t automatically dismiss something you’re not very familiar with—do some research, talk to more than one lender before you make a decision. If you find a lender you think you like, check them out with the Better Business Bureau and ask if you can talk to a current customer or two.
In other words, do you have a good understanding of the financial condition of your business? It’s not uncommon for a lender to say, “If I understand more about a business by looking at the numbers than the business owner does, I’m not going to approve their loan request.”
Most small business owners don’t dive into their entrepreneurial dream because they’re really excited about the financial side of running a business. Nevertheless, it’s critical to understand to both build a successful business and identify the financing opportunities that make the most sense for your situation. Some lenders want to see detailed financial projections, profit & loss statements, pro-forma invoice earning estimates, and a business plan. Others will want to see tax returns or bank statements. Having access to these reports is important, but a thorough understanding of what they’re telling you is even more so. If you’re not sure about what the reports are telling you, your accountant or CPA can explain them to you so you do.
The first place most small businesses look is their bank. It makes sense; it’s where they have their business checking account or maybe a savings account. What’s more, depending upon your credit profile, the nature of your business, and other factors, this might be a good choice. Nevertheless, don’t be discouraged if they decline your loan application and don’t feel like you should stop there even if they say, “Yes”. There are more options for small business borrowers than ever before, if you’re willing to look around. And, if your business isn’t a good fit for the bank, there are many non-bank lenders willing to offer a small business loan to a healthy, growing business—if you’re willing to look online.
Thinking more strategically about small business borrowing isn’t a guarantee of a loan approval, but it will help you determine what makes the most sense for your business and help you put your best foot forward. The answers should identify areas where you are strong and others where you might need to work on things a bit. Regularly revisiting these five keys will help you as your business grows and your situation changes.