The Dreaded Lending Process: Qualifying for a Business Loan

We’ve all heard it…”Banks only want to lend to those who don’t need a loan…”

What does that really mean?  How can you, as a small business owner, prepare to present yourself in that first conversation about the possibility of qualifying for some bank financing?  It can be an intimidating thought, but here are a few pointers to consider in advance:

Get your house in order

The first thing a lender will want to see is some historical financial information.  You don’t need to go into the first conversation with a full set of audited reports, but make sure you know your basics. Your revenue- how much you sold last year.  Your profit – how much you made after all expenses.  Your margins.  How many customers do you have?  What are your plans for this year?  What’s your market like these days?  Any business owner knows these to some degree instinctually, but if they have reviewed and rehearsed the factual information, and their style of presentation, it’s a huge advantage.  Go in prepared!

Know your expenses: know how your business works

What are your most significant expenses?  Are they accounted for correctly? Can they be reduced?  What is the last time you shopped suppliers?  What are your indirect costs and how do these impact you?  Do you watch your expenses on a consistent basis?  Have they gone up in the last year while sales are lower?  Investigate, investigate, and investigate some more!

Be willing to share in the risk; have some skin in the game

Here’s a hypothetical: a friend tells you there is a terrific new product to buy, and he wants to sell you thousands worth of it.  You learn that he gets a commission on the sale, but he is not investing in any of this amazing product for himself.  Would you do it?  Probably not!  A lending institution is not all that different; they will expect you to have some share in the risk.  That means leaving some earnings in the company, not taking a huge bonus at the end of every year that empties the coffers of the business.

Understand the meaning and importance of cash flow

When a banker looks at any business, he or she needs to determine the reliability of their cash flow.  You can be showing a nice profit, but it can be tied up in equipment.  You need liquidity- cash flow – not just profit.  If you get a loan, you need the reliable flow of cash into the business to meet your payroll, your operating expenses, your product cost, and the loan payment.

Consider the first conversation a learning experience

Preparing to go before a lender can be an informative and valuable exercise- especially if you get turned down the first time.  You may be disappointed, but make sure you learn from that experience!  A good loan officer will be very willing to educate you about what they really look at, what they would need to see in your business to be ready to move forward.  Get educated- take some prudent steps to be on more solid footing and be ready to go back to the table next year!

To you success,