As any entrepreneur will tell you, financing a business is no small undertaking. Pulling funds from personal bank accounts, liquidating assets, talking to friends and relatives about your venture — these are all actions you might take to get your business up and running. Banks and other financial institutions could also play a role.
In fact, for many small businesses, some form of debt is essential. According to a recent study by the Harvard Business School, about 48 percent of business owners reported a major bank as their primary financing relationship. Another 34 percent identified a regional or community bank as their main capital financing partner.
Understanding the following factors — fundamentals that loan officers scrutinize — could increase your chances of getting a small business loan:
- Cash flow. Lenders want assurance that your business will pay back the loan without fail. Your job? Convincing them that your company won’t default. Calculate cash flow at least quarterly and try to optimize those numbers before applying for the loan. Understand the support for your financial statements and be able to defend any projections.
- Collateral. This is the asset or group of assets a lender can recover to offset loan losses. In the case of a mortgage, it’s the market value of the property underlying a home loan. To bolster your case to a loan officer, consider getting independent appraisals of major assets to be used as collateral. Those assets might include inventory or company-owned real estate.
- Credit history. Any competent loan officer will examine your credit history before approving a loan. Sometimes otherwise strong businesses face financial troubles due to problems beyond the owner’s control. But know that if your credit is less than stellar, banks may be reluctant to lend. So plan early and make every effort to fortify your credit report. Paying off old loans or renegotiating supplier contracts may lift your credit score and increase the likelihood of loan approval.
- Expert advice. Lenders want assurance that you’re serious about the future of your business. Let the bank know that you’re seeking financial guidance from your accountant and other knowledgeable advisers.