Securing a Loan: Top 5 Tips for a Small Business
At some point in the life cycle of a business, most small business owners will need to apply for a loan.
The process can be daunting, even intimidating, because proving you and your business are creditworthy takes effort and preparation. Here are five tips to increase your chances of successfully securing a business loan.
1. Seek advice from a mentor: Even before you launch a new business, finding someone who has related industry experience (another business owner, colleague or trusted professional) can improve your odds at avoiding pitfalls and overcoming challenges. A trusted mentor can walk you through the process of obtaining a loan, at the right time, and for the right reasons.
2. Know your credit score: Pull your personal credit score to ensure there are no errors. Your credit score is a crucial part of how a lender will assess your risk as a borrower. Having the best credit possible is important because it provides insight to your character and propensity to repay financial obligations.
3. Be realistic and honest: Don’t give unrealistic projections on growth and profits. Small-business owners should understand that a lender will find you more credible if you can present a complete picture of your business, where you are today, upside potential and downside scenarios. A lender needs to believe you are providing reliable information. Acknowledging your weaknesses and demonstrating that you have considered stumbling blocks suggests that you have a plan to deal with adverse events.
4. Build a cash reserve: A lender is willing to take a certain amount of risk by extending a business loan. However, business owners should know this is a shared risk and, ultimately, the business owner is responsible for doing everything in her power to repay the loan. Inevitably, there will be hiccups in a business operation. Maintaining a cash reserve for unexpected situations provides flexibility and peace of mind. Lenders look for liquidity as a sign the business can continue to make loan payments.
5. Cash flow empowers: The bottom line is that you need positive cash flow to pay for your debt. Lenders want to see evidence (through financial statements) that your business can make payments and will be able to consistently repay obligations. Supplying clear, orderly financial records and paperwork suggests to lenders that your information is accurate and that you have sufficient cash flow to meet your loan payments. Strong cash flow will give you leverage to qualify for and negotiate more favorable financing terms.
THIS MONTH’S EXPERT
Sherri Lee, VP, Commercial Banking Bank of Hawaii