If you missed our webinar, here’s a recap of our conversation with Carol O’Connell, Assistant VP of Excelsior Growth Fund, a non-profit organization that provides small business loans and advisory services.
Carol took a survey amongst her colleagues at EGF, and she learned one of the major obstacles of success for small business owners is cracking the code. What does that mean? In this case, it means access to capital. If you’re a start-up or an existing business, you’ve already put your equity into it. But to take things to the next level, you’ll likely need to borrow finances and the obstacles can vary.
Here are six business issues to overcome before submitting a loan application.
Step 1: Do the necessary prep work before starting the application process.
For an existing business, it’s recommended that you put in 2-3 months of prep work before applying for the loan. For a start-up, you might be working 6-12 months in advance.
This applies primarily to existing small businesses. Even if it’s a simple excel spreadsheet, you need to keep your records, including revenue and income, up-to-date. But it’s highly recommend that you use accounting software because a lender is going to ask of a current snapshot of the business’ financial condition.
This is an absolute must. Like your individual taxes, you want to be a good, upstanding taxpayer and that goes for the same with your business. The sooner you file in a given tax year, the sooner a lender is going to want to speak to you. It’s common to get an extension, but it could drag out the application process.
You’re entitled to ask for a full record of your business credit report from the three credit reporting agencies once a year. This doesn’t just mean your score. It means your payment history as well. If you see any errors, jump on it right away. Be up-to-date on any delinquencies. There are also a lot of free resources to help you use certain credit cards and lines of credit to bump up your credit score.
For a start-up, creating a business plan is very common practice, but a lot of existing businesses probably haven’t pulled out their business plan in years. Craft an executive summary and a capabilities statement to outline your management capacity.
Step #2: Know your industry and competitors.
Take the time to develop talking points on your business’ operation, cycles and competition as well as industry trends. As a start-up, you probably put a lot of work and thought into this already, but a lot of existing businesses may have let this fall by the wayside. Are you really in tune with what’s going on in the industry or is your head in the sand? But more than likely, you probably have a few extra competitors out there. Analyze what your advantages are over your competitors and explain how the loan will help give you an advantage in your industry.
Step #3: Understand your financials.
You’ll be providing the lender both the tax returns and interim results. If you’re in the middle of the year, you’ll be sharing the first, second quarter earnings and balance sheet. A lot of questions will come up, and you’ll need to do a little homework to be ready to answer those questions. If you’re not comfortable with accounting and bookkeeping, now is the time to take a workshop from educational services, such as BusinessBlocks.
Often, a small business owner will hire a tax preparer to reduce the company’s bottom line profitability, in turn decreasing tax liability. While this strategy could work in the short term, it could also be a great detriment and disservice when it comes time to apply for a loan because you’re underreporting your profit.
Furthermore, you may want to ask for advice from a tax accountant on the different ways to account for revenue and expenses within your specific industry. For example, there’s always a lot of debate as to whether a business owner should report salary as their expense or take no salary and report it as a distribution after all bills have been paid. That is something to discuss with your accountant as well as many other topics like this.
Step $4: Prepare for your loan interview.
Today, a lot of loans are automated, so you may not get a chance to speak with the lender. But it’s always a great opportunity if you can. You want to speak to your lender with confidence about where your business is and where you want to take that business in the future.
First impressions count and can affect your loan outcome.
A lender is looking at the business, but a small business owner and the business is one in the same. Also be ready to discuss critical or crisis periods. If last year wasn’t your best year in business, be straightforward. Lenders value honesty and integrity – those are very important elements in the loan review process.
Don’t underestimate the ability of a lender to learn things through research and a little forensic accounting.
They will be able to see the weaknesses in the business, so it’s highly recommended that you get in front of it and address it right away with a reasonable explanation.
Step #5: Determine your loan purpose and amount.
This is your time to articulate, very specifically, what you need the funding for. If you’re an existing business that landed a big contract with a customer, you’ll be asking for more capital to build your inventory and receivables. Or perhaps you have a piece of equipment that is worn out and outdated, and the new machinery would allow you to operate more efficiently with a new equipment loan. Assign a dollar amount to each of those needs.
When a lender asks, “How much do you need?” Your response should never be “How much can you give me?” That’s a big red flag.
Organize your numbers on an itemized list and be ready to talk about how you’ll use those things and how you’ve determined those costs. To add, if you’re in growth mode and are looking for a high amount, the lender may ask if you have any savings or funds you’re personally going to invest into the project.
Step #6: Complete the loan application accurately and thoroughly.
Take the time to go through the application multiple times. Check every detail and make sure each question is answered accurately. Then share the application with someone you trust, like a business advisor to see if it makes sense to other people, not just from your perspective. Again, do not underestimate a lender’s ability to obtain information via search services. To note: If a small business owner approaches a traditional bank, they may be additional hurdles. There are certain criteria when applying for a loan, and regardless of how much prep work you do, you may not be able to successfully get over those hurdles either because you haven’t been in business long enough, your profit levels are too small or your credit score is not as strong as a traditional bank lender is asking for.
So what’s the secret weapon to help you score a business loan? Being prepared.
If you’re an existing business thinking about applying for a business loan in 2018, start now even if it’s the second part of the year. You can do all the work in advance and save yourself a lot of grief.
© 2018 BusinessBlocks. All rights reserved.