Often small businesses must rely on debt to launch operations during crucial start-up years, expand into new markets, or weather economic downturns. But getting approval for business loans can be a discouraging process. Understandably, lenders are trained to be skeptical. They look for potential risk — risk that the business may not survive or the loans won’t be paid back. One of your main tasks as a business owner is to convince lenders that your company is financially sound and those risks have been considered and mitigated.
How do you make a convincing argument? Be able to sell and support the following three “talking points”:
- You and your partners are a good risk. Lenders seek assurance that your team has the capacity to carry out a solid business plan. They’ll want evidence of strong management skills and real life experience in your company’s industry. Assuage their doubts by demonstrating that you and your partners have paid back loans in the past. Get a copy of your credit report and make sure to correct any errors before applying for a loan. If your firm has been operating for a while, consider getting a credit report for the business as well. Once you receive the loan, follow through. That way, you’ll have a solid repayment history to show potential lenders next time around.
- The loan amount makes sense. Not too much, not too little. Average loans offered by the Small Business Administration run about $300,000, but they can range from micro-loans of $5,000 to guaranteed loans in the millions of dollars. Estimating the size of the loan will depend on its expected uses — equipment, real estate, software development, and so on. Underestimate your financing needs and the company may deplete working capital too soon. Take out a loan that’s too big, and you may run into cash flow problems when it’s time to pay off the debt. So take a hard look at the business reasons for the loan and associated financial projections.
- You have “skin in the game.” Lenders want security. Should your company run into unexpected difficulties, lenders want to know that collateral supporting the loan is sufficient. Personal and business assets — everything from money in the owner’s bank account to equipment on the warehouse floor — can provide that assurance.
If you’d like help compiling a loan package or analyzing your business needs, give Carl Heinemann, your Chattanooga CPA, a call.