Business loans are a frequently used resource to help support a company's growth. The tricky part is getting the capital when it is needed. If the company doesn't prepare for getting a business loan far in advance of when they require it, the lack of a cash infusion may be detrimental to the company in the long run.
That's why I believe it is important to always be prepared to apply for a business loan. Here is what the company can do right now:
1. Have your current financial statements.
A company needs to have detailed year-to-date results. This is the first thing that any business loan source will want to see.
I recommend that business owners review their financial statements for accuracy and to understand what they mean to past and future performance. To help analysis, it's best to include a comparison to the previous year or quarter.
2. Measure free cash flow.
Are you able to explain the sources of free cash flow that will be used to pay back any loan? (Free cash flow is the amount of cash that the company has at the end of any given period that is not required for the operation of the business.)
Calculate your company's current ratio—that is, current assets divided by current liabilities. It should be greater than one to show the ability to pay your current obligations.
3. Boost sales growth.
In my experience, lenders like to see at least a 10-percent revenue growth year over year. Business loan sources like companies whose sales are growing rapidly.
Why? Because they want to fund growth, not fill in for losses. They believe that growing companies are in a better position to pay back debt than shrinking ones.
4. Monitor business and personal credit scores.
Business loan lenders like numbers and will always check scores.
A business credit score usually ranges from zero to 100. Paying vendors on time is a great way to boost this.
Personal credit scores are typically from 300 to 850. The formula for boosting this is a bit more complicated. It can take into consideration the amount of outstanding personal debt, the credit still available and the lack of late payment flags.
5. Build relationships with possible lenders.
Ultimately, people make business loans to a person, not a business.
This means that company owners can benefit from cultivating relationships with lenders far in advance of ever applying for a business loan. This way, the source may be more likely to give the loan when the company needs it.
In my last company, I asked lenders to be on my board of advisers before I ever asked any of them for a loan.
6. Be willing to risk personal collateral.
Business loan lenders feel more secure if the debt is backed up by a personal guarantee from someone (likely the owners) who has significant financial assets.
This is because it is nearly impossible to recover a loan when a company goes bankrupt, and much easier to put a lien on a property or a stock portfolio.
Similarly, lenders believe that owners will be more careful with their money if they are risking their own at the same time.
7. Check current economic conditions.
The national and regional outlook can have a huge effect on credit decisions. If the lending source thinks the economy is headed for recession, this can affect the availability of credit.
With that in mind, I recommend applying for a business loan during good economic times, even if it is ahead of when the company actually needs the money.
Overall, whenever presenting for a business loan, be organized, detailed and over-prepared for any question that might come up. Have a specific plan for how much money is needed, what it will be used for and how exactly it will be paid back. This diligence ahead of time may help increase your company's odds of getting a business loan.
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