These days, small business circles consider ‘credit’ a four-letter word. Almost everyone is hurting for it and almost no one is getting it.
The reasoning is simple: the economic downturn has zipped tight consumers’ pocketbooks, causing companies to default on loans, and burning banks in the process. Everyone is on edge.
“Standards are pretty tight right now; banks really want to dig into things more than they ever have,” says Mike Lubansky, senior financial analyst for Sageworks, Inc., a financial analysis company based in Raleigh, North Carolina.
He says banks are interested in knowing exactly why you want the money, an exact breakdown of how you will use it, and exactly when you will pay it back. They want to inspect your personal credit history, look at your assets, check into back years of financial statements and discuss revenue projections—based on real numbers.
What if you don’t have those numbers yet? What if you have bad credit?
Fear not. Here are a few things you can do right now.
Do some research
If you don’t have a history, Lubansky suggests surveying your industry to find financial information on like-businesses. This information can help you form an educated business projection.
"You want to be able to talk about industry trends—specifically positive growth trends; the more knowledgeably you can talk to a lending institution about your industry, the better,” he says.
Bankers need a lot of information before doling out a loan, so make sure to have your ducks in a row before starting a conversation, advises Denise Winston, founder of Money Start Here, a financial education company in Bakersfield, California.
She says banks want at least two years worth of tax returns, two years worth of business licenses, copies of your accounts receivable, and evidence of your credit situation. If you have bad credit, address it upfront.
“Go to the banker with the full story; the more complete it is, the better off you will be—a banker wants a complete package, start to finish,” she says.
Approach your bank
Multiple loan inquiries over a short period of time only hurt your credit score, so before pounding the pavement, Winston recommends looking to the institution where you already bank.
“Relationship banking is really big—this is where you use the same bank for everything,” she says. “If they already know you, you may get better pricing and better loan opportunities.”
Consider alternative financing
Peer-to-peer lending (i.e. individuals who want to invest and individuals who need investments) is gaining in popularity as of late, and according to Barbara Weltman, New York-based small business consultant and author of J.K. Lasser’s Small Business Taxes 2011: Your Complete Guide to a Better Bottom Line, this can be a viable option for a cash-strapped small business.
“I recommend checking out Prosper; you explain what you need and individuals may contribute to your cause; it is like a personal loan,” she says.
Other peer-to-peer lending resources include Lending Club and the Peer Lending Network.
Additional resources on this topic:
How to Get the Financing for Your New Small Business: Innovative Solutions from the Experts Who Do It Every Day, by Sharon Fullen
Financing Your Small Business: From SBA Loans and Credit Cards to Common Stock and Partnership Interests, by James Burk
The Rational Guide to Building Small Business Credit, by Barbara Weltman