Ok, we all know what has been going on in the markets and the ramification on small business has been, in many cases, devastating. This entire forum is devoted to small business owners, and those who dream of one day being a small business owner. With that in mind, I want to outline what today's environment means to you:
1) Your personal credit score it vitally important. For every person with a bad credit score, there is a story to go along with it. Banks are no longer taking chances on people with poor credit, regardless of the story behind it. I had to decline a loan last week because their credit score had been impacted by a mix-up with an insurance company, resulting on a judgment against the person. They had no idea there even was a judgment against them, and other than that they had perfect credit. The powers that be at banks are setting higher standards than ever, and are less likely to make exceptions.
What this means to you: Get your personal credit in order before submitting any application for a business loan. Get a copy of your credit report (you are entitled to a free copy from each of the 3 major bureaus (annualcreditreport.com) every year) and review it for errors and inaccuracies. Makes sure all delinquent accounts are brought current, and make sure you satisfy all liens and judgments against you. As mean as it sounds, the days of sob stories are over. If you don't have good credit, you will most likely not get approved for a loan. Period.
2) Cash is King (Part 1) - So often people are looking 100% financing. On occasion, that used to be possible. In today's market, lenders want you to have "skin in the game", something to lose if the business fails. If they are risking their money, they want you to risk yours too.
What this means to you: If you want a business loan, be prepared and have cash available to put into the deal. If you don't have cash, you need to get your personal budget in order and SAVE. Banks don't want to see you use a home equity loan or a gift from mom and dad; they want to see that you have saved this money yourself. It shows your commitment to the project, and discipline to put money aside over a period of time.
3) Cash is King (Part 2): Before the credit crisis, lenders would consider lending to borrowers with marginal cash flow. Today, that is much less likely. If your business does not generate cash flow that is sufficient to cover you debt obligations 1.25 times, lenders will look long and hard and if there is nothing to mitigate that risk, your loan will be declined.
What this means to you: Instead of submitting a loan application and crossing your fingers, understand your cash flows beforehand. If there are issues, indentify areas that can be improved and implement measures that will them. Recognizing the problem and taking steps to rectify them is the best way to show a lender that you understand their concerns. These changes may not be enough to get you approved this month or year, but if you can make material changes over the course of an entire year, it will be evident in the cash flow on your tax returns/financial statements.
THE BOTTOM LINE: Nothing I've outlined above is new in terms of credit fundamentals. What is new is the fact that now that the credit bubble has burst, lenders will be returning to these fundamentals, and will only extend credit to those borrowers who fit within the criteria noted above. If you want to be approved, you may have to take some time to get your ducks in a row. Many people want their money NOW, but now that the game has changed, you'll need to patient and be willing to wait. Like my mom always said patience is a virtue.
If you need help with any of the above (personal budgets, credit score, or cash flow analysis), No Bull Funding can help. NoBullFunding@gmail.com