The Essentials of Small Business Funding

4 Mins read

It is now over a decade since the 2008 recession and the lending atmosphere is recovering well enough to accommodate small businesses once more. The alternative lending market grew as the recession tightened its grips on small business, but statistics show that it is only a tiny 10.89% of borrowers approach them for business funding.

A more massive 66.34% still try their luck at more extensive and more established brick and mortar financial institutions for funds.  When we talk of an improved lending environment, you need to know that the system is coming from a very dark past.

In 2011 for example, mainstream banking lent money to a chosen few, numbering 8.9% of all requests. The refined atmosphere we are talking about has only accommodated 25.9% of all funding applications. This begs the question, why do they reject the remaining 74% of business funding requests?

To answer this question, you probably need to acquire a banker’s mindset. Keep in mind that banks are for-profit entities and they are not bashful about it.

Think like a bank

  • Banks treat your loan application just as a potential employer treats a resume. They expect dazzling applications detailing sources of collateral. They will most certainly hire the potential entrepreneur who understands cash flow and how to run a profitable business.
  • Banks will also lend money to a borrower who is clear about the amount of money they require to fund their dream business. If you ask for more than you need, many banks will shut their doors on you.
  • Learn the lending lingua. Know the APR of your loan because believe it not, approaching lenders is like jumping into shark-infested choppy waters. If you do not know what to expect you will be handed terms that could sink you.

While the economy today is running on the backs of small businesses, it is getting harder day by day. Getting funding is often the thorny issue every business owner has to deal with. Unlike angel investors, friends or family banks do not fund an idea.

You wouldn’t too if you were a bank. You have your depositor’s money to protect. Will you give it away to an idea? No. To cut back on the frustration that comes with chasing down financing here are a few things you need to know about business funding.

Things you need to know about small business funding

Banks love collateral

The Small Business Administration has put checks in place that guarantee a part of the money extended to small businesses by banks. This, of course, makes the banks more at ease with startups, opening up their vaults since the government has taken away part of the risk of lending.

If you are going in solo, you need to have your own sources of collateral to please the bankers. The bank will place your collateral sources on their weighing scales to ensure that they keep them as far away from risk as possible. This is why most business use home equity and other personal assets as a source of business finance. Home equity loans are very risky sources of business financing. Be very careful if you are considering your home as collateral. You could end up losing your home if the business goes awry and you are unable to sustain your loan repayments.

Make a business plan

If you are going to be taking out a commercial loan, some banks will want to see your business plan. A few banks might ask for a comprehensive plan, but most just want the short or lean format of your business plan.

Financial details

Lenders love a borrower who is in top-notch financial shape. If you have been tardy with your debts and loans, you will not impress them to give you a loan. Why? They love a good credit score. It is a sign of financial responsibility and money management skill.

It makes them less worried about you losing their investor’s money. So, when approaching a bank for funding, clean up your financial closets and your credit score as well. Have all your bank accounts, tax ID, sources and quantities of past and present loans and credit card information at your fingertips.

Audited financial statements

Have your balance sheet, profit and loss statements audited and ready for presentation to your lender. Audited statements have been reviewed by a qualified CPA, who can be charged with a felony if they are inaccurate or misleading.

A profit and loss statement should go back as far as three years of your financial history. This, of course, applies to businesses that are not startups. Your balance sheet should outline all liabilities, assets, and capital you have. Larger companies will be required to present extensive paperwork that smaller business start-ups.

Insurance information

A bank can be more attentive to you if you have put all measures in place to reduce risks. If for example, your business is dependent on you, they will prefer it if you have life insurance that covers you or other founders. The payout should be directed to the bank to settle the borrowed loan first.

Tips to ensure that you get that loan

  • Have money in your account before you set out to acquire business financing. Segway Financial’s Hanna Kassis advices that lenders love to see a positive ending balance. It is a good case of putting your money where your mouth is.
  • The health of your credit score dramatically affects your chances of getting a loan approved up to dollar 5000 . Your credit scores could be adversely impacted by not only poor financial habits but the poor credit score of a spouse or a divorce that has dented your line of credit. An excellent financial history can be built through financial savviness. Acquiring microloans for example and repaying them back in time will improve your FICO scores.
  • There are businesses that lenders perceive as riskier to fund than others. Companies that are in the retail, hospitality, and service sectors are disadvantaged when it comes to funding access. Business in real estate, agriculture, insurance, finance, and wholesale industries are deemed less risky and stand better chances of having their loans approved.
  • If you are a woman or in minority populations, there are loans set aside for you to help you succeed. You might even access grants if you do your homework.
  • Start small. Establish just how little you need to start and look for it. Get by with as low as possible because looking for large business loans will not only drain your time but your energy as well since banks are very risk-averse. They will only give money that they are sure will earn a profit. If loans are hard to come by, break up your business idea into chunks that can be funded at a time as you get the startup from the ground.

If you want to spend less time chasing funding and more time building your business, keep the points mentioned above in mind. They will go a long way in ensuring that you are prepared for the rigorous processes of business funding acquisition and increase your chances of a positive outcome too.

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About author
Ryan Kh is a big data and analytic expert, marketing digital products on Amazon's Envato. He is not just passionate about latest buzz and tech stuff but in fact he's totally into it. Follow Ryan’s daily posts on Catalyst For Business.
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