Your First Steps Towards Loan Financing
Establishing relationships with creditors and lenders prior to seeking funding is key to successful financing. The more they know and understand you as a person, the more they will trust you. When it comes to money, nothing is more important than trust.
Additionally, be sure to find the right lender. If you approach a lender known for helping businesses that are far different from your own – your chances of success are much smaller. The Northern California Small Business Development Centers (NorCal SBDC) can assist you in finding loans in your community.
Several variables are weighed by banks and lenders in making loan decisions. Those include: credit history, financial stability of the company, the company’s ability to service debt, strength and value of the collateral, economic outlook, and the support available by the company’s guarantors.
What Your Lender Needs
- Company’s financial statements including the balance sheet, income statement and business tax returns
- Personal financial statements and tax returns
- Monthly cash-flow projections based on obtaining the loan
- Thorough business plan
- Specific details on how the loan would be used
- Company management profile & outlook
1. Financial Statements
Having a professional analyze your financial statements prior to asking for a loan can help you clean up simple mistakes and unnecessary flags for potential lenders. Additionally, having an accountant or a NorCal SBDC Business Advisor help you understand the contents of your financial statements will prepare you for answering lender questions.
Keep in mind that financial statements report conditions during a defined period of time. If you have a large project or sale that is pending, proof of that pending income should be provided to the lender. Providing a written summary of the financial statements can go a long way to helping you get funding.
2. Ability to Service Debt
Having a plan to pay back a loan is crucial to securing funding. Prepare projections with expenses and earnings and incorporate the new loan payments into your plan. NorCal SBDC Business Advisors have a template for this spreadsheet and can help.
Be sure to include a built in safety net for when projections fall short of expectations. This advance consideration helps lenders know that you’ve thought the request through, have considered cash flows, and are committed to repayment of the debt.
3. Collateral Value
Collateral is essential to business lending in today’s market. Without it, a lender relies solely on future performance or existing cash flow to repay the debt. This can translate into higher risk and interest rates for borrowers.
Loans that are self-collateralizing – meaning that the asset purchased with loan funds has a defined market value (such as equipment loans) – are sometimes easier to secure. Construction improvements on storefronts that are leased or rented are more difficult to secure and lenders can ask for a “blanket lien” on the business assets. Be prepared to provide a collateral package to your lender and try to confine the lien to specific assets so that others are unencumbered for future financing.
A NorCal SBDC Business Advisor can help determine the best use of available collateral for your business.
4. Industry Outlook
Lenders typically rely on written material about any given industry, may not fully understand yours, and could misinterpret average standards of performance.
Don’t allow your company to be lumped into industry trends that don’t adequately reflect your company’s future. Be proactive by providing a summary of what is happening industry-wide and how you are approaching future opportunities. A NorCal SBDC Business Advisor can show you how to find relevant industry information to include in your loan package.
5. Guarantor Support
By approaching your lender with a personal guarantee, you send a clear message that you are willing to stand behind your business. It is a big red flag for a potential lender when questions regarding the development of a corporation to protect personal assets are mentioned, so be aware of the message you’re sending.
6. Increase Your Odds
Over the past three years, NorCal SBDC Advisors have assisted companies like yours secure $66.8 million in loan funds. With locations throughout Northern California and confidential no-cost coaching just a click or call away — don’t wait to find out how our services can benefit your business.