In an ideal world when establishing or expanding a small business, it would be best to utilize personal resources. However, as we all know, this is not always possible. Furthermore, if used properly and responsibly, financial leverage can be a very efficient way to expand your small business, many times more efficient than if one were to utilize only personal resources. This credit crunch has created an environment where capital for businesses seems almost impossible to acquire. It is important that now more than ever we have a solid foundation and ask/know the right questions to be able to answer about your business if you are to obtain a loan from a bank. Here are some tips on how to secure a loan for small business development or expansion. This may seem very basic, but you would be amazed how few small businesses are able to answer the following questions.
How is your relationship with your lender?
Trust is a very important factor in the lender/client relationship. It is essential that the lender get to know you on a more personal level before you complete the loan process. The more they know you, your circumstances and your integrity, the more they will trust that you are a good credit risk. The more they trust you, the more likely you will be able to obtain a loan from them. Visit the lender on several occasions before applying for the loan to ask questions and explore the loan application process. Let him/her see that you are a serious customer who thoroughly investigates your options before making major decisions. You want that lender on your side fighting for you.
How do you plan to repay the loan?
One must put themselves in the position of a lender. From their perspective, the main concern is that the lending institution must be able to get their money back in a timely manner. They want to know your precise and detailed strategies for repaying the loan. In addition, be prepared to tell them how you expect to repay the loan if your business falls short of hitting its projected revenue numbers.
How comprehensive is your business plan?
Some people make the mistake in thinking that a long business plan increases the chances of receiving a loan. In the eyes of a lender, the length of a business plan is not as important as one that is comprehensive and technically sound. How well does the plan articulate your business goals and projections? Do you use deceptive language that attempts to disguise potential problems or risks? Here are a few key elements that should be included within every business plan:
• Make sure that your plan addresses all contingencies.
• Be articulate and thorough about all plans for the future.
• Make sure that you effectively communicate the capacity of the ENTIRE management team to implement the actions outlined within the plan.
• Make sure the financial statements are prepared through sound research of your industry.
How much money do you want to borrow?
Many make the mistake of asking for extra money thereby, providing a "cushion" for times of uncertainty. A loan should not serve as a cushion nor provide for the "extras" but should only provide for the real needs of your business. Commit to doing enough research to determine a precise amount that will be required when starting or expanding your small business. Keep in mind that the lender must trust you and believe that you have thoroughly researched the exact amount of money required to meet the goals of your business plan.
Are you talking to the right lender?
Since there are a variety of lenders, make sure you talk to the lender who will address the needs of the business you are creating or attempting to expand. If you are a small business, it might be more to your advantage to talk to a small business loan provider. An extra perk is the lender who has some familiarity with the industry in which your company operates. Do your research and find the best suited lending institution for you and your company.
Do you have a personal financial plan?
When applying for a loan, your personal financial situation most certainly matters. If your personal financial situation is in disarray, the lender is less likely to trust that you will be able to responsibly handle any additional funds required for your business. Before you begin planning for your business, take the time to get your personal financial situation in order. Some things you should have in place are as follows:
• Adequate insurance coverage for your family and loved ones.
• Up-to-date estate planning documents.
• An emergency fund worth 12 months of living expenses. (I generally state that 6 - 9 months of living expenses are sufficient; however, because starting a business is extremely risky, it is best save as much liquidity as possible before pursuing your venture.)
• A solid FICO score of at least 720.
Take the time to make sure these items are in place before you start your business and apply for a business loan. I understand that you are excited about starting or growing your business, but proper planning and preparation will ensure that your company will be around for the long term and not falter because of a weak personal financial foundation. With 60 - 80% of all new employment coming from small businesses...we need your success to ensure the recovery of this economy!
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