The small business lending environment is improving. Preparing a strong case will enhance your ability to secure financing.
With interest rates still low and the economy improving, business lending is on firmer footing than at any time since the financial crisis. That means that businesses with sound financials, a comprehensive plan, and a thoughtful approach to the lending market are well positioned to secure the financing they need.
Preparation is essential, however, says Neil Berdiev, author of The Loan Financing Guide for Small Business Owners. “There are several key questions that you should be able to answer before you approach a bank: how much money do you need to borrow, why do you need to borrow the money, and when and how do you plan to pay the money back?” he says. “If you know your financials and what is driving your business results, and you are well prepared, you should be in good shape when you meet with a lender.”
Gathering the right documentation
Whether you bring your financial information with you to a meeting or email a packet immediately after, preparing at least three years of financial statements that demonstrate a history of profitability is a great place to start with your documentation. For a smaller, less well-established business, providing a thorough business plan can demonstrate to a lender that you’ve put careful thought into where you want the business to go and provide the context for the financing you seek. A marketing plan, cash flow projections, an analysis of your position relative to competitors, and even a succession plan can also be helpful in making your case for a loan.
The Small Business Association (SBA) notes that most lenders require small business owners to provide a personal credit history, personal financial statements, and personal guarantees from all principal owners. “Ensure your personal credit is in good shape by monitoring your credit report and regularly requesting your credit score,” Berdiev says. “Also watch how much other credit you have outstanding, because financial institutions are not going to want to go over a debt-to-income ratio of 36 to 40 percent.”
Choosing the right lender
Banks, credit unions, and community banks serve different markets and make loans of different sizes, so it makes sense to study the market before you approach a specific institution, says Berdiev. “If you’re plugged into a network of business owners who you trust, they can probably tell you which institutions make the size of loan you’re looking to get,” he adds. “Your accountant or attorney is another good resource.”
Beware of approaching just one institution based on a recommendation, however, because the friend or colleague who had a good experience with a particular lend may be in a much different situation than you are. One way to get a good sense of the entire market and what institutions may be in play for your type of loan is to call a number of commercial loan officers at area financial institutions. With some basic information in hand from all these resources, you’re in a better position to decide which lenders to approach.
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