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Top 10 Factors Affecting Small Business Financing

Share current LOB: small-business-banking

Many factors can compromise a small business financing decision. To have the greatest chance of success, you should identify the factors you can control and manage, as well as address variables beyond your control.

Here is a list of such factors:

Things You Can Control

  • A strong business plan for capital infusion.Produce a clearly written plan for how you will use financing to grow profits. Include the type of loan terms you need and build the loan specifics into your projected profitability forecast. Explain your business, how the capital will help it grow and how you will use the capital. Work with an experienced Service Corps of Retired Executives (SCORE) counselor who can help test your business case, sharpen your forecasts and articulate your growth plan. Writing down your plan will make it clearer when presenting it to others.
  • Accurate and complete application documentation. Most loans require time-consuming paperwork that can be hard to assemble. If you’re serious about pursuing financing, get the help you need to pull together the right paperwork, rather than take a chance and miss something that can jeopardize your chances. Work with a banker who can assist you with documentation of your loan and streamline the process.
  • Professional and credible financial statements.  A strong business with poorly documented financial statements can cause a lender to question approval. Most owners do not have financial backgrounds, so it is important to work with your accountant to understand and prepare balance sheets and cash flow statements in advance. Depending upon the size and working history of your business, many lenders will require both personal and business financials.
  • Working relationship.  Relationships play a big role in financing decisions, because the owner is ultimately the one who will have to deliver on the promise to pay and execute the plan. The more the lender understands you and your business, the better your chances of success. Build a track record with your lender, before you need money. For example, consider a contractor with an established track record in construction who wants to reposition her business as a player in the high-growth solar-power market. She needs additional capital to invest in training and equipment.  Since she has worked successfully with her bank in the past, she is able to obtain an SBA loan, even though the solarpower market is a new venture with no specific operating history.

Things You Can Manage

  • Collateral.  Traditional loans will want the owner to secure financing with collateral, which likely will be a highly liquid or saleable asset, such as cash, investments, a house or a vehicle. If your business does not have these tangible assets, an SBA guarantee will allow your banker to offer the loan regardless.
  • Capacity to repay the loan.  Lenders want some evidence that you can repay the loan. This requires global loan coverage, meaning enough cash flow to easily make the monthly loan payment. A banker would like to see 1.4 times the cash flow. An SBA-guaranteed loan can help companies with limited cash flow extend the term of a traditional loan from an average of four years to seven.
  • History.  Traditional loans require three years of business history. SBA loans can finance operating capital for growth companies and earlier-stage businesses that have only one or two years of financials.
  • Commitment.  Most business lenders want you to have equity investment in the deal. Traditional bank loans require a 25 to 30 percent down payment. With an SBA guarantee, owners can get a loan approved with only a 10 percent down payment.

Things You Cannot Control

  • Industry or Technology Risk.  Lenders simply won’t offer a loan to certain industries and technology-oriented businesses. Ask your banker to be upfront about these realities, so you don’t waste time pursuing financing that is out of bounds for your business.
  • Economic Climate.  Interest-rate fluctuations and credit availability are realities you must address as part of the financing process. Use your working relationship with lenders to talk through and anticipate financing needs. That way, you can take advantage of openings in credit availability and lower interest rates when they appear — even if the timing isn’t perfect for your growth plans. Proactive bankers will help you optimize unused cash from financing until you need it.

What you can and can't control


This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

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