small business finance

Smart Strategies: Keys to small business financing

Financing your business can be an integral part of whether you grow. To many business owners, this can be very intimidating, as it is usually not an area of expertise.

In 20-plus years career of putting loans together, I’ve seen many times what a business owner needs to do in preparation for a loan and what kind of lending institutions are there to help.

I have had a small business owner tell me financing his business was the most frustrating thing he has ever done. It is much more difficult than financing a house or car. You must be prepared. Keep your credit clean, your bank accounts clean and show that your business makes money. These simple procedures will help you go a long way in securing a good business loan.

Credit check

Preparation is key to getting a loan, and sometimes proper preparation may take six to nine months — this may make the difference in a good loan, a bad loan or no loan at all. Loans are all based on what type of risk factor your business is. There are ways to mitigate the risk and show the lender you are a good risk.

First and foremost, how is your credit? Do you know your score? What I have found is a 680 and above credit score is a threshold to getting a better loan.

If you know you will want a loan in the next 12 months, pull your credit and see what your score is. is a good way to do this. This will not put an inquiry on your credit file but will give you a good idea of your credit score.

If you have a low score, consider obtaining the service of a good credit repair company to see if they can help. There is a cost; however, the cost of getting your credit repaired and your score increased is small compared with the alternative of being unable to get a loan. In addition, the loan will not be as costly with a higher credit score.

If you need credit repair, be prepared to go through a six- to nine-month process to properly increase your score. This is not a guarantee, but a good credit repair company will know whether they can help.

Financial records

It’s important to keep your company and personal bank accounts separate. Use your business accounts for business transactions only.

Another very important factor is how much money does your company make? What is your net income + depreciation? Lenders want to see that your business makes money.

An accountant’s job is for clients to have as little of a tax burden as possible, and many times the result is a tax return that will show no or little income. If you want to get loan, you have to show that the business makes money.

Like I stated earlier, loans are based on risk and the ability to afford the loan. If a company shows zero taxable income, a lender may perceive they do not have sufficient cash flow to pay back a loan.

Are there other factors lenders use in determining cash flow? Yes, but showing sufficient income is a huge factor in the ability to get a loan. Too many times in my career I have had a small business tell me, “I’m a small business and don’t like to pay taxes, so I write off as much as possible.”

My advice is to prepare your income statement and taxes accordingly to get a loan. Income statements and tax returns may not exactly look the same; the lender will be looking for an explanation of the difference and how the two add up. Sometimes, with nonbank lenders, loans can be obtained without showing financials or tax returns, but the best bet is to prepare one just in case.

Have a plan

You now have properly prepared and are ready to go to a lender for a loan. Do you know concisely what you are going to use the money for? Do you have collateral to back the loan, or are you looking for an unsecured loan? Loans that are unsecured with no collateral are the riskiest. If approved for one of these, be prepared to pay a higher interest rate and upfront fees.

Lenders want to know what you are going to use the loan for and how you are going to pay them back. When going for a loan, if a lender asks for more information, do not argue with them — just provide them with the information. It is the lender’s money they are loaning, and they want to have a comfort factor they will get repaid.

Where to go

You have everything in line to properly present a loan package — now where do you go? Most companies will try their local bank, as this is the lending institution they most likely have a relationship with.

Banks are just one of several types of lending institutions. Others include independent financial companies, private lenders and loans brokers.

All lenders have certain types of loans they are looking make and should be able to tell you what they are. Just because you get turned down at your bank or somewhere else does not mean you are necessarily a bad risk; it may be as simple as that institution does not make types of loans you are requesting. Certain lenders like real estate only, some capital equipment only; some do unsecured loans. Knowing what types of loans a lender does can be valuable in going to the correct institution.