I love road trips. There’s nothing better than loading up the bike and setting off to see what’s over the next hill. Sometimes the trip includes exploring undiscovered country, but just as often, it’s a new twist on familiar territory. Fortunately, whether it’s exploring someplace new or revisiting someplace I’ve been before, every trip is an adventure.
The week or so before leaving I always check the bike to make sure everything is running properly to avoid any surprises out in the middle of nowhere. Sometimes I end up taking my bike into the shop for a tune-up or a new set of tires. I would never neglect the pre-flight check to make sure I have all my ducks in a row.
I consider the process for seeking a small business loan the same way. I would never talk to a lender unless my financial ducks were all in a row too.
Of course every lender is different, but there is some basic information you should have a handle on before you apply for a loan. What’s more, having your financial ducks in a row doesn’t necessarily mean your financial house must be in perfect order, but it does mean you must have a perfect understanding of where you are and what you’re doing to make it better—particularly if you have less-than-perfect financials.
I often have the opportunity to speak to both traditional and alternative small business lenders about their experiences with small business owners. Without exception, they all hate saying, “No.”
Although I believe the credit pendulum has swung too far to the “no” side of the scale and believe there should be a credit easing for the Main Street, microbusinesses, you and I identify with, it’s hard for me to entirely blame the banks and other lenders.
Small businesses, particularly Main Street businesses, are risky. About half of all the small businesses that are around today won’t be here ten years from now.
With that in mind, I’d like to share what lenders are looking for in a good candidate for a small business loan. It’s a lot like making sure my motorcycle has enough tread on the tires, the brakes are working properly, all the lights are in good running order, and there aren’t any hidden problems lurking just under the surface.
When’s the last time you looked at a profit and loss statement? If it’s been a while since you’ve taken the time to create one or reviewed the statement your accountant puts together for you, take the time. If you don’t understand what it’s saying, ask your accountant or other trusted financial advisor to make sure you do. Not too long ago I spoke with a lender who said, “If I know more about the financial health of a borrower’s small business by looking at their P&L than they do, I’m not going to give them a loan.” This, along with your bank statement is considered basic financial information your lender will likely want to review before they give you a loan.What’s the plan? Without exception, every lender I speak with wants to know what you intend to do with the proceeds of a loan. Are you going to buy new equipment or ramp up a marketing initiative? What’s more, notes on a napkin aren’t enough. If you want to improve your odds at the bank, for example, you’ll need a formal document that outlines your plans, what you expect the positive impact will be on your business, and your plans for repayment. One banker I’ve spoken with recently suggested that a good business plan along with a strong P&L will help her justify a small business loan even if you’ve had some struggles in the past.What if things don’t go as planned? Nobody wants to think about what will happen if an initiative fails, but lenders want to know what you’ll do if your new marketing plan or piece of equipment doesn’t create the positive results you think it should. Nobody wants to lend to a business that doesn’t have the means to repay the loan—which is why early-stage startups without an income are so hard to fund with debt. Traditional and alternative lenders aren’t equity investors. They want your monthly payments and they expect you to start making them once they give you the loan. If you can’t demonstrate that you will be able to do that, you’re not going to get the loan. This “what if” situation must be addressed in your business plan.Do you have the right team? Although every lender has a different risk tolerance—in other words, some lenders are more risk averse than others—anything you can do to make a loan to your small business appear less risky is a good idea. The SBA and most banks will want to see resumes of all the key players in your organization to ascertain whether or not you have the expertise to see your successful initiative though. Although there are alternative lenders more interested in other aspects of your business, doing this doesn’t just benefit the lender. This also gives you an opportunity to evaluate where you are strong and where you may be lacking. Lenders want to confirm that you’re taking a thoughtful approach to how you manage growth and financing. Anything you can do to demonstrate that is a good idea.Do you have any skin in the game? If you’re like most Main Street business owners I know, you consider the blood, sweat, and tears you put into your business “skin in the game.” At least that’s how I always felt. Unfortunately, many lenders do not. If you look at it from the perspective of a highly risk averse lender, they see your financial investment of personal funds as an incentive to make sure you execute your plan and reap the hoped for ROI. This isn’t always cash, it could be real estate used as collateral, factoring your accounts receivable, or leveraging your regular and predictable credit card transactions (if you’re in a business that takes credit cards).Knowing what lenders are looking for gives you an opportunity to set you and your business apart from the rest of the crowd. Being prepared to have a thoughtful and reasoned conversation about your business and how you intend to make it grow will make you a much more attractive candidate for a loan than most of the other small business owners who don’t take the extra time to prepare for their first conversation with a lender. Being able to demonstrate that you’re on top of the financial aspect of your business empowers you when making other decisions about your business too.
Because you know what’s going on under the hood, you’re in a better position to discover what’s over the next hill.
