One thing is for sure, many business owners are feeling optimistic about the economy and the current and future health of their business. With economic growth reaching an average of 3% in recent quarters, and consumer confidence at historic high levels, put together, you have ideal conditions for business growth opportunities.
When opportunity knocks, not all Owners are prepared to answer the door. Why? Assessing lending options and finding the best working capital is unfamiliar territory for most.
Getting a business loan can provide the fuel your business needs to reach the next level. If you are planning to borrow money for what you believe is a smart investment and growth/expansion opportunity, B2B CFO® recommends business owners should consider these critical strategies:
Determine the purpose of the loan. Yes, it seems obvious, but the purpose of the loan will help you identify whether you’re trying to fill a short-term or a long-term need. The more specific you are to lenders, the better. For example, short-term financing to hire more staff or to purchase quick-turnaround inventory is a different financing structure than obtaining new equipment, acquiring another business or expanding to new locations. A clearly defined purpose for the loan will help determine the most advantageous length of the loan and terms.
Calculate your loan amount. How much can you afford to barrow? You will need to communicate and calculate the amount of money you want to borrow to any business lender. Every lender has a ceiling, and some financial institutions may be a better fit for a larger or smaller loan. So, knowing your amount will determine the best route. Also, don’t forget soft costs, like training or implementation for software or new equipment—some lenders will allow that to be financed as well, and if not, be sure to budget for it out of available cash.
Plan your repayment process: The most important item to communicate (to the banker), is how are you going to repay the loan? Be specific and be realistic in your payback projections. Every banker has a boss and their boss is going to ask them, “How are we going to be paid back?”. Answer this question for the banker and make his job of getting you a “Yes” easier.
Know your numbers: Stick to the facts (and numbers). As business owners, we are passionate about the business and enjoy telling everyone about the business’ successes and what makes us different. This energy is good and should be conveyed, but keep the “sales pitch” short. Bankers are lending you money and they want money back (numbers; not passion). Let the numbers tell the story. Focus on explaining your business and how you will use the money you want to borrow in clear and compelling terms.
Share a solid financial performance and projections package. Typically, lenders will want to see both a year-to-date P&L, updated within the past 60 days, statements from the previous 2 or 3 years, and a pro-forma look ahead to justify your borrowing needs.
Additionally, try to learn what key numbers the lender will consider, and know how your numbers meet or exceed those benchmarks. Many lenders focus in on your current and proposed debt service ratio, which demonstrates if you make enough money each month or year to make your note payments and have money left over. But, other lenders may have other criteria—for example I recently had a lender pass on a loan request because they did not make loans to companies with total debt greater than 6x annual operating profit/EBITDA.
Compare your loan options. Not all banks are alike. Some focus on real estate loans, others like working capital loans, some prefer inventory and receivables, etc. Before you ever need to obtain a loan, ask your peers for banking recommendations. Spend time in your community getting to know the banks and what types of loans they typically provide. If you feel the need (or have) sent your loan request to 10 banks, you are knocking on the wrong doors. If you have done your research and know your banks’ appetites, 2-4 bank candidates are all you will need.
Expand your banking relationships. Get to know your banker before help is needed by inviting them to tour your business. Try to create a strong relationship with the local bank. Continue to nurture this relationship but also expand your banking contacts and business relationship to other banks. Meet with other lenders and consider using different banks for different financing products. Think long-term and find at least 2 banks with enough scale and capability to serve as partners as you grow your business. Change is inevitable, markets shift, and bankers change positions. Plan for it.
Do your research. Banks are still the most common lenders for small businesses. In the last decade, alternative lenders have popped up to serve small businesses. With these new lenders, businesses have access to much more capital to finance their company’s growth. However, with new funding sources, still make sure whatever financing plan you pursue makes the best financial sense for your company’s future.
When opportunity knocks, answer the door. Forecasting your growth options and opportunities now will pay off in the long run. Preparing for these 7 steps now will allow you to pursue the right loans at the right time, for the right terms. Debt is not something that should be entered into hastily, but it is also not something to be feared or avoided in the right circumstances. You should think strategically—and as a trusted B2B CFO®, I can advise you and your business through these financial decisions and how to obtain lending that makes sense for you. Contact me today for a complimentary discussion. DavidGirault@B2BCFO.com