Cash flow constitutes the life blood of all small businesses, allowing ventures to pay employees and suppliers while keeping their doors open.
The way entrepreneurs secure capital has changed dramatically over the last 10 years, however. The use of crowdfunding, instant online loans and peer-to-peer financing as well as the emergence of lender-agnostic marketplaces has changed the way small firms seek and secure money. While some say traditional bank financing is a thing of the past, commercial bank lending remains a strong and viable option for most startup and growing businesses. In fact, lending backed by U.S. Small Business Administration guarantee programs hit record levels in 2014 and should exceed those levels this year.
Over the years, I have tapped into the knowledge and experience of our lending partners to create this list of the top five steps to securing small business capital:
Become credit worthy. Borrowers should deal with negative financial issues, including poor or inaccurate credit reports, and must resolve all business and personal tax issues. A negative credit report or credit score can be a deal buster for many lenders. Back taxes, liens, garnishments and multiple bounced checks all increase risk for a lender. Borrowers should deal with recent bankruptcies by providing an explanation of why it occurred. Address all of these issues prior to applying for a business loan.
Build a better business plan. Lenders stress that a business plan must be well thought out and realistic. The business plan should outline the money, management and marketing of a business. One lender said, “I need to understand that you understand what you’re getting into.” Borrowers must explain how the money will be used and repaid. Repayment ability is the critical factor. Without repayment ability, no traditional lender will extend a business loan, and few will provide 100 percent financing.
Plan for the worst-case scenario. Most lenders require borrowers to provide a minimum of 12 months of financial projections. These projections should be broken down into a month-to-month format. The business owner must understand how these assumptions were developed and establish their validity. Lenders agree projections must be presented with best-, middle- and worst-case scenarios. How will the business survive if revenues drop 10 percent, 20 percent or 30 percent over the next six to 12 months? This hands-on forecasting will help the borrower become more strategic in their thinking and help the lender feel more comfortable with repayment ability.
Two years of business history is desired. Loans to established, financially strong and quality businesses are easy to approve. Loans to startup businesses can be more difficult to approve without the ability to show long-term repayment ability. Lenders could require an additional cash equity injection by the owner or even a seller carry back to reduce the size of the loan. A proven franchise concept might help mitigate risk.
Become a hands-on owner. Collect accounts receivable in a timely manner — don’t allow your customers to drag out payment terms. If necessary, get in your car and visit customers who haven’t paid timely and owe you large amounts of money. Don’t keep all your cash liquidity tied up in inventory. Review your business operations to see what work can be handled in-house and not
contracted out. Review each business expense and eliminate discretionary items that could help generate additional cash flow. Eliminating unprofitable account relationships could also help the bottom line. Increase your efforts to market your business. Many business owners make the mistake of cutting marketing expenses when business slows.