Almost any small business needs financing to grow at some point.
However, in today’s economic world, finding those funds is difficult, if not impossible.
Happily, if pundits are to be believed, the loan spigot is opening up.
James Coughlin of Asterisk Financial offers this detailed primer on how to find and win funding.
Getting a loan in 2012 still requires a focused effort, good references, impeccable financial documentation and often an established track record.
It also requires a solid game plan, a strategy that will guide you through what can be a challenging, tricky process, so you can come out the other side with the right amount of funds to invest in future growth.
Here are Coughlin’s tips to successfully complete your loan application:
Tip No. 1: Foster relationships with multiple lenders in advance.
Because different types of loans are often more attractive to different lenders, and because competition is always helpful when trying to obtain a loan, get to know more than one lender as part of your capital-raising process.
Here’s another reason this is important: Different banks offer different types of business lending. Some have a wide variety of products while others specialize in a particular type of loan. Some might do just real-estate lending, while others lend primarily to contractors, truckers or restaurants. Some also refuse to lend in particular areas, such as manufacturing, because they feel they can’t adequately value it. Get to know what types of businesses the banks in your area will – or will not – lend to.
Also keep track of local lenders that are active in your industry, the same as you would for any other key vendors or customers you seek to cultivate. Referrals from other successful businesses that have borrowed are also a great way to expand your network while also increasing your chances of a successful loan.
Like any other business, banks operate under the law of supply and demand. For different types of loans at different times, they may be unable to offer you the product you’re looking for – or at a reasonable cost. On other hand, a bank may have excess capacity in a certain type of loan. Banks try to diversify their risk by managing their loan portfolio. By pursuing multiple lenders, you’re more likely to find the type of bank that has excess capacity in just your type of loan.
As an example, think of a food distributor seeking a $5 million real-estate loan for a new facility. In that case, going to their longtime lender that specializes in credit lines for distributors might not be the best fit, especially if that bank isn’t known for dealing in real-estate products.
Tip No. 2: Choose your lender or lenders carefully when applying for a loan; understand how they will act now and later.
This may sound like an obvious point, but make sure the lender is capable of lending the money. You can do this by searching on the FDIC website, or by accessing Bankrate.com’s “Safe and Sound” ratings.
It’s also critical to discover, as much as possible, how a bank will act down the road. For instance, if you have a five-year bullet loan for real estate that’s amortized over 20 years, you’re going to have to refinance or redo the loan at the end of the five years – or pay the whole thing off. What if the bank decides it doesn’t want to renew the loan at the end of the term? Or what if it had approved your loan as part of a push into a new category or location, but then decides three years from now that strategy was a bad bet?
How a bank will act if it runs into issues is typically something you can discover by talking with other companies that have done business with them. If a bank has a reputation of being difficult to deal with on the back end, you need to be prepared for that scenario, because you’re not going to be a special case. Conversely, if they’re known for working with customers through difficult situations, it will probably be true for you as well, as long as you hold up your end of the bargain.
Tip No. 3: Communicate your business plan clearly and thoroughly.
You can’t just walk into a bank and tell the loan officer, “I sell widgets to people in the plastics industry, and I need $1 million for working capital.” He has no idea about your customers, the nature of your market, your competitors, and what your widgets are used for. He might ask at that point, “If they’re selling their product right now, why do they need money from me?” He’ll probably conclude things aren’t working out with your current bank or you’re running out of cash.
These are some other things the business plan needs to include:
- A discussion of what your products or services are, including why they’re better than the competition and will continue to be.
- Who your customers are; they don’t have to be named initially, but you’ll have to at some point. Banks wants to know your customers are going to keep buying tomorrow, and whether you have one that represents 60% of your sales or it’s evenly distributed. They need to understand so they can accurately assess the risk and avoid surprises down the road.
- Information on your facilities, whether owned or leased, and if leased, what the terms are.
- It’s important to explain your sales and marketing process, because that increases their confidence that they understand your business, and it gives you an opportunity to present everything in the best light possible.
- If there’s anything specialized about your business, it needs to be communicated without getting caught up in the minutia – getting in too deep could bog down the process with too many questions.
Tip No. 4: Communicate business history through high-quality financial information.
The better the quality of the financial information you provide, and the more detail, the easier it will be to work with the lender. The lender will want to look closely at your cash flow, the balance sheet and the collateral. It should be noted that your financial statement doesn’t need to be audited, but having your accountant prepare it is useful.
Here are some other things lenders will look for in your financials:
- They’ll want to see your personal tax returns, to see what kind of value creation is happening besides what is reflected on your books. It’s another way for the bank to get to know you, and gauge what kinds of resources you can bring to bear to fix any problem that arises.
- They want to know whether you can afford to stop taking a normal paycheck from the business or you’re running so close to the edge that you can’t stomach a 50% pay cut.
- They want to know what assets you have that can be pursued through a personal guarantee if the loan defaults. On this note, you may want to consider personal-guarantee insurance to hedge against the loss of major assets such as your home and bank accounts. This is especially important if you have partners and a “joint and several” clause, where everyone is responsible for up to 100% of the liability.
- Almost every business has some special characteristics that need to be explained. If you’re a government supplier, a lot of your receivables are going to look bad, since the average collection period is 90-120 days, but the government isn’t going to default on payments, so that’s a plus. Another example: Contractors, who get paid ahead of projects, need to make sure this information is recorded on their balance sheet. Make sure you get out in front of these details, because sometimes a lender won’t know what questions to ask, and they could penalize you down the road. Provide details about your receivables: Who they’re with, how quickly they’re paid, who are the problem payers, etc. Providing these types of details upfront makes you look good, turning seeming negatives into positives, and you avoid scrambling to answer critical questions.
Tip No. 5: Remember that little things matter.
Nothing is unimportant, especially in a challenging credit market. If there’s anything you’ve provided that’s unclear, or something’s not addressed, the bank won’t make the loan, especially if there are more requests than money to lend and standards are high. In that environment, bad marks add up quickly.
Consider the site visit. The lender is going to stop by at some point, kicking the tires, walking around, talking to people, checking out your product and inventory. Make sure you present well, just as you would for an open house to sell your home. If you’re not ready for that, it could be a checkmark against you.
Since the process can take months, maintaining momentum is critical. And any number of issues can stall it, from proof of insurance to an inactive shareholder you can’t get to sign, or corporate documents that are out of date or unavailable.
You have to do everything you can to help minimize delays. If you have a meeting set up with the underwriting committee but fail to provide requested information in advance, and you miss that date, it could be a while before you get back on their calendar. Unanswered questions and delays start to stack up in the mind of the lender, and they may decide to move on.
Given the current competitive environment for small-business capital, you can’t afford to leave anything to chance. Being as prepared as you possibly can be in terms of knowing the lenders and what they specialize in, having a thorough business plan, buttoning up your financials – and responding to every request for information or query in a timely manner – can easily tip the balance in your favor.