Improve Your Ability to Get a Small Business Loan Oct 8 2014 321Views 37Likes 4CommentsShare on LinkedInShare on FacebookShare on Google PluseShare on Twitter Are small business loans tougher to get? Is it just your imagination or are small business loans more difficult to get than ever? And if thats true, how can you improve your chances of getting a loan? A recent Harvard Business School working paper (2.9Mb PDF) discusses the current state of small business lending. Although focused on the US I suspect its findings reflect much of the wider world. I wont keep you in suspense. Yes, small business loans are more difficult to get with ...every major survey point[ing] to credit access being a problem... with the result that small business loans...are down about 20% since the financial crisis [of 2008]. There are several reasons for this including: A dampening effect of increased regulatory oversight causing banks to assess businesses more stringently. Banks are consolidating and becoming larger with the effect that underwriting decisions are increasingly centralized and based less on softer...criteria such as knowledge of the borrower from a long term relationship. Small business loans are typically more time-consuming and less profitable for banks. As a result, banks are less likely to engage in lending at the smallest dollar level. Tougher access to business loans is a significant problem for entrepreneurs because bank credit...is one of the primary sources of external financing for small businesses.... But you already knew that! So whats an entrepreneur to do? How to improve your chances of getting a small business loan While many factors relating to the availability of small business credit are beyond your control there are still things you can (and should) do to improve your chances: I. Understand your lender Think of your lender as another supplier that you need to negotiate with. The better you understand them, the better those discussions will go. Here is some insight to start you off. Just as you sell widgets to make money, loan officers sell loans to make money. S/he WANTS to provide you with a loan. But just as you wont sell to those who wont pay you, neither will your loan officer. She will use a checklist called the 5 Cs of Credit to assess your businesss credit worthiness: Character refers to the reputation of the businesss management and includes things like stability, experience, track record and behaviour (especially in times of difficulty). Capacity is the ability of your business to repay the loan. This includes assessing future cash flows and your businesss debt-to-income ratio. In short: will your business generate enough cash to pay the loan back. Capital is calculated as your businesss net worth: how much it owns minus how much it owes. Collateral refers to business assets that could be sold by the bank to help repay the loan in the event of non-payment. Conditions describe the environment in which your business operates including competitors, customers, regulations, your overall industry, and the broader economy. Banks and other lenders further reduce their risk by specializing in certain industries or providing certain kinds of loans. For example, many lenders prefer not to deal with startup restaurants because of the industrys high failure rate; other lenders, however, welcome restaurants and have tailored their offerings to meet a restaurants unique circumstances. Take some time to learn about small business lending and then use this understanding to prepare for your first meeting. Your new lender will appreciate it. II. Speak your lenders language Banking and business use money to keep score and have an extensive money-based language. Entrepreneurs – you! – must use this language to be heard and understood. If you dont, potential lenders will assume youre not in the game. Your lender will want to see a complete set of financial statement projections (income statement, balance sheet, statement of cash flows) that show reasonable assumptions with appropriate cash flow and debt coverage. They will be pleased that your tax returns are filed on time. They will be delighted that you get monthly working statements and work closely with a bookkeeper and accountant. Intuit, the makers of QuickBooks software, conducted a study showing that 83% of small business owners cant pass a basic financial literacy test. Set yourself apart from the majority of small business owners: learn the language of business and make it easier for your lender to understand you – and lend you money. III. Optimize your personal credit score Most startups and many small businesses rate poorly on one or more of the 5Cs. This makes them ineligible for a business loan. Your loan officer will try to compensate for this by asking you to personally guarantee the business loan. This is normal and you should expect it. For the bank to accept your personal guarantee they must be comfortable with your personal credit history. For many banks, the most critical factor used to determine this is your personal credit score. In the US the personal credit score (often called a FICO score after the company who invented it) is a number between 300 and 850 that indicates the likelihood that youll repay a loan. Many banks, especially larger ones, have thresholds below which they will not lend. Therefore, you must know and understand your personal credit score before visiting your loan officer. You should also review the details that make up your credit score, confirm that they are accurate, and correct any errors. This can be a time-consuming process so start immediately. A breath of fresh air... Lenders often complain about entrepreneurs who show up unprepared when looking for a business loan. Improve your chances significantly by understanding your lender, learning to speak her language, and having a solid personal credit score. You and your lender will then have a very productive first meeting. Good luck!
Posted on: Wed, 08 Oct 2014 21:16:58 +0000
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