Securing credit is high on the list of priorities for many business owners, especially during economic expansion. Whether you see the opportunities to put capital to work or want to take advantage of your improving financial performance, the time to think about access to credit is before you need it.
Many factors can compromise a business financing decision. To have the greatest chance of success, you should think like a banker and prepare a compelling case for the credit request. You should present a persuasive business narrative including an engaging, thorough and well-thought-out business story with insight into company operates, management discipline and long-term plans. Creating a winning business story means identifying the factors you can control and manage as well as addressing variables beyond your control.
Things You Can Control
- A strong business plan for capital infusion. An important part of your business story is how you plan to use the financing being requested. When it comes to providing credit to your company, bankers want more than just ideas: they want facts and details. 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. Use your management team and key advisors (including your banker) to 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.
- Professional and credible financial statements. A strong business with poorly documented financial statements can cause a lender to question approval. While it may be appropriate for smaller companies to rely on compiled financial statements, larger companies and those with more complex credit needs will be expected to have audited statements. For example, audited statements provide the bank with greater assurance that the company is in compliance with Generally Accepted Accounting Principles (GAAP) and that a third-party has validated internal controls. Keep in mind also, that depending upon the size and working history of your business, many lenders will require both personal and business financials when backing closely held private companies.
- Working relationship. Relationships play a big role in financing decisions. 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. Be cognizant that a relationship is a two-way street. While your banker wants to understand who you are and how your business is being run, you should also understand your banker and the role they play within their bank. Work with your bank’s team. Go to them for advice and expert assistance. And of course, recognize that a bank is usually looking at your entire relationship, one that can extend beyond a single product or service.
Things You Can Manage
- Collateral. Traditional loans for larger growth-oriented and mature businesses require financing to be secured with collateral, which likely will be a highly liquid or saleable asset such as cash, inventory, investments, a house or a vehicle. If your business does not have these tangible assets and meets certain size restrictions, a Small Business Administration (SBA) guarantee may allow your banker to offer the loan regardless.
- Capacity to repay the loan. Lenders want evidence that you can repay the loan. This requires global loan coverage, meaning enough cash flow to easily make the monthly loan payment. When conventional financing is not an option, an SBA-guaranteed loan can help smaller companies with limited cash flow extend the term of a traditional loan from an average of four years to seven.
- History. You can't change the history of your business, but you can change how you present it to your banker. The most accurate way to evaluate your future performance is to understand how the company has performed in the past. Proactive expense control, profitability and the ability of management to adapt is of interest to your banker. Traditional loans typically require a longer business history than SBA-backed loans, which can accommodate smaller, growth companies and earlier-stage businesses that have only one or two years of financials.
Things You Cannot Control
- Industry Risk. Lenders manage risks inherent in certain industries or types of businesses. Ask your banker to be upfront about these realities.
- 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.