According to Professor John Paglia, Pepperdine’s Graziadio School of Business and Management, the top two issues that businesses face are economic uncertainty and access to capital. The state of the economy has caused lenders to be more frugal with their lending and more cautious about whom they lend to. Despite the state of the economy there is still a fair amount of lending going on to assist small businesses.
There are several avenues that a business owner can visit to acquire capital. Bank loans, Small Business Association (SBA) programs, trade credit, and credit cards are a few options.
Regardless of where you plan on going, there a few things you should know prior to asking for any type of financing.
Know Your Business
It is important to understand your business before you ask for funding. Lenders want to see that you are knowledgeable about the health of your business and your operations. The more they understand your operations the more likely they will be able to see the company’s future potential and offer financing. Remember to plan ahead and secure financing before your business is in dire need of it.
A good way to understand the inner workings of your business is to write a business plan. Business plans are a written form of your business’s ideas, concepts, goods and/or services, goals, and the financial state of the company. According to Karlene Sinclair-Robinson, The Small Business Funding Guide Blog, writing a business plan allows you to “effectively describe and explain financials and other critical details” of your business. Some financials that you should familiarize yourself with include your business’s current balance sheet and cash flow profit and loss statements.
Before asking for financing you should know exactly why you need the funds and how they will be used. Whether it’s to update equipment, hire new staff, or improve cash flow you need to have a clear plan of how the financing will be used. It is also advisable to have several repayment plans ready. Robinson says, it “shows the lender that you have thought out the varied possibilities and that you have accounted for them.” You should also know what type of collateral you would be willing to put up. Preferably, it should be business collateral not personal. Accounts receivable is a common form of business collateral.
Lenders have to be comfortable taking on the risk of offering financing to you. If you do not know your business they will see you as too much of a risk and decide not to grant you financing.
Before you enter a bank or contact an investor, you need to educate yourself of the various components associated with each option. Not all lenders are appropriate for your business and do not offer the types of loans that you may be looking for.
The first step is to figure out what type of financing would work best for your business. Bank loans may be a better fit if you do not want to surrender part ownership of your business, which is typically what angel investors would want. However, angel investors tend to take on more risk than banks. It is important to decide what types of financing you want to pursue before asking.
Once you have decided, the next step is to learn everything you can about the lender. “Whether the lender is a traditional banking institution or an alternative financing source”, says Robinson, “knowing as much as possible about them is vital to the success of your being approved for a loan or other type of financing”. For instance, banks offer a variety of loans with differentiating fees, repayment requirements, and interest rates, some of which might not work for you. Take advantage of the various resources that are offered to business owners to assist in determining the best option.
The Small Business Association is an important resource to make use of. The SBA helps in getting a loan using three primary tools: capital, contracts, and counseling. Become acquainted with the various programs that SBA offers and decide if it is the best route for your business. Visit www.SBA.gov for further details.
There are several other resources available to small businesses. Dun & Bradstreet Credit Resources provides small businesses with over 250 articles about a variety of business topics, such as business credit, finances, loans, and raising capital. Wells Fargo & Company offers their business insight resource center to business owners. Visit www.DandB.com and www.Wellsfargobusinessinsights.com for more information.
Build and Monitor Business Credit
One of the most important factors in getting a loan is having good credit. Lenders look at your credit score to determine the risk involved in granting you financing. You should look into your credit profile to determine if there are any discrepancies and if so take corrective actions. Dun &Bradstreet is one company that offers credit building and monitoring services.
Finally, be prepared before meeting with any potential lenders. Have all the necessary documents in order: recent financial statements, a business plan, and tax forms of the business and business owner should be included. Every small business should be ready to apply for a loan because you never know when you’ll need one.
Financing your business does not have to be so difficult. It’s the power of knowledge that assists businesses seeking and acquiring capital.