Marc L. Goldberg
Banks typically only approve less than 15% of the loans sought. However as a small business owner, bank financing is usually the most reliable source. What are some of the actions you can take to prepare for a loan to assure maximum potential for acceptance?
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Alan Haut, ND SBA District Director advises, before you begin writing your proposal, there are four things that you need to be able to clearly address: (1) how much money is needed? (2) how will the money be used? (3) how will the funds be repaid? And (4) what will be done if the business is unable to repay the loan?
Tips to get started:
Build and maintain a good credit rating Credibility is number one in what a lender will review. And, your credit rating is a measure of your trustworthiness. What lenders want to know more than anything else is, will they get their loan repaid and a credit rating is a measure of one’s past history of paying bills.
Be organized. Get your finances in order and have all your documents (income, expenses, assets and debts) up-to-date. It is helpful for both the borrower and the potential lender to have all your documents ready when the application is submitted rather than having to search for specific documents during the evaluation period.
Execute a Cash Flow forecast. Once the amount of financing needed is determined, the next step is to determine if you can afford it. How? By doing a cash flow forecast. If the amount of cash flowing is not adequate, then an adjustment in the amount requested might be needed. The business’s past history will determine the validity and realism in the projections. By doing this exercise in advance of applying the lender will see that there is realism in the request.
Know the type of loan needed. Before applying, a review of the different types of loans that are available is in order.
Term Loan: This is the classic loan option. A term loan provides you with a lump sum of cash that you’ll pay back (with interest) in regular increments until you’ve paid off the entirety of the borrowed funds.
Short Term Loan: Short term loans are like term loans, just faster and more expensive. You’ll face higher interest rates and shorter repayment terms, but you’ll get money in the bank very quickly.
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Business Line of Credit: A business line of credit is a revolving credit line that gets you access to ongoing capital. When you use your credit line, you’ll only pay interest on the portion you borrowed. Once you repay the borrowed funds, then you get access to the capital again — no need to reapply.
Business Credit Card: A business credit card works much the same as a personal credit card. Use your credit card to buy now, pay later. It’s a great way to expand your available capital and build your credit score.
Merchant Cash Advance: Use a merchant cash advance to trade tomorrow’s earnings for cash today. Your lender will provide you with a lump sum of money that you’ll repay with a percentage of your daily sales.
SBA 7(a) Loan: Small Business Administration (SBA) 7(a) loans are one of the most sought-after business loans. They have large lending amounts, competitive interest rates, and generous repayment terms. They’re challenging to qualify for and notoriously paperwork-heavy, but they’re the best
Financing small businesses can find.
Accounts Receivable Financing: Accounts receivable financing (also known as factoring) lets you trade your outstanding invoices for immediate cash. If you just need extra money to cover a slump or pay your own bills, factoring may give you all the financing you need.
Keep your business plan updated. Lenders want to know where the funds are going to be used and what is the overall plan for the business. They want to know how the loan will help the business and that the management team has the capacity to manage the business and pay off the loan. That is the role of the business plan in the loan analysis. Not all lenders require business plans, but it is best to have at least a Business Model Canvas plan (www.strategyzer.com) to show that forethought has been given to the enterprises direction.
Contributed by Marc L. Goldberg, Certified Mentor, SCORE Cape Cod & the Islands, www.capecod.score.org, [email protected], 508/775-4884.