It’s a new year and with it, come the inevitable personal resolutions, most of which will be abandoned before Groundhog Day. For your business though, this is a great time to sit back and reflect on your business goals. You are tasked with pulling together all of your business financial information in preparation for a visit to your accountant, so while the information is fresh in your mind, review it with an eye to where you want to take your business in the next 1-5 years. If expansion plans, new equipment or other enhancements to your business make the list, you will need to make the call on how you will fund your plans. Unless you have buckets of cash lying around, you will likely need to look outside for funding of your next great idea.
Finding angel investors in the form of family and friends may seem like the easier road to travel, but if your business takes a turn for the worse, the financial damage is only a small part of the potential impact to those supporting relationships. Making a pitch on “Shark Tank” or to other venture capitalists brings with it an equity stake that may be more than you want to relinquish to still feel as though you are in control of your business. After all, one of the reasons you probably became an entrepreneur was that control thing.
That leaves some form of loan – whether it be a traditional small business loan or via crowdfunding through the likes of Kiva, Indiegogo or Kickstarter.
I know, loan and debt are both four letter words; if you were like me, you were raised to believe that there is no such thing as good debt. But when done correctly (the equivalent of a mortgage on your house, for example), taking on a loan to fund your business growth is an investment in your business’ future. As your business grows, the impact spreads throughout the economy. Most people don’t realize it, but small businesses, often heralded as the engines of economic growth, employ 48% of the national workforce in the US. So what is the process for securing your share of small business loans? Here are some tips to help guide you:
Define the Need
You may think you need money, but no source will fund you if you do not present clear cut rationale for the loan. You must clarify your goals, what you are trying to accomplish with the cash infusion and, more importantly, what the increased revenue projections would be as a result. Approval is likely contingent on the profit potential of the investment.
A practical example is a landscape company who wants to purchase new standing mowers to service more customers vs. a competitor who wants the money to repair existing equipment. The former is more likely to get approved as the service company can then book additional customers with the new equipment, thereby generating more revenue.
How much money do you need? Be particularly cautious of overextending for the anticipated return. You do not want to ask for more money than can reasonably be paid back or that, with your financial projections, would not generate the appropriate level of revenue for the expense outlay. You may need to go through multiple iterations and jump through the proverbial hoops to come up with the mix that makes your request “Just Right”.
Securing a small business loan does not happen overnight. The process could take a minimum of 2 months, possibly more for those less qualified or those who are deemed to be a higher risk. Starting the process before it becomes critical gives you a leg up. “Never let them see you sweat” applies here. It is also somewhat of a truism that it is easier to get a loan when you don’t need one. If you have entered the desperation phase, your chances of success will likely be diminished.
The other aspect to be realistic about is the interest rate. You may be able to get a loan faster with some of the non-traditional funding sources such online lenders but they may not be as trustworthy. They do not have to be compliant with the same regulations that FDIC insured banks or credit unions need to follow regarding terms and conditions of the loan. Do your due diligence regarding the lender and their practices.
Document, Document, Document
While it may seem like a pain, a well-researched and presented business plan with detailed financial projections can go a long way to help you make your case to prospective lenders. And while a business plan with supporting financial is the lead, assembling a strong ensemble cast including P&L statements, tax forms, net worth statement and credit scores can help get the Golden Loan nomination. Assemble enough information and tell a compelling story so that a potential lender can understand your business and evaluate the financial health and any associated risks with your company. To help you out, here is an SBA checklist of the type of documentation you will need to take to a prospective lender. Click here for the checklist.
There are a number of resources out there for small business owners to leverage to get your business up and running or expand it with an infusion of cash. Look to your local business banker and foster a relationship where you have an advocate on your side to support your loan request. Lean on your accountant and attorney for advisory support. Leverage the free resources of organizations such as the SBA, your local SCORE chapter and/or the Small Business Development Centers (SBDC) affiliated with your local university (ies). The more people you pull in to act as a sounding board, the more likely you are to vet your ideas and help you find any holes that may be escaping your tunnel vision. While one or more may not be as enamored with your business concept as you are, they can certainly play devil’s advocate and help you produce a sounder proposal. And wouldn’t you prefer to hear from someone with whom you are comfortable sharing your ideas and concepts than some faceless loan officer?
Hopefully, these tips will help you be successful in getting funding when you need it to propel your business forward – without losing control of what is important to you and your business.