5 Major Mistakes Small Businesses Make When Looking for a Loan
The media is full of stories about how difficult it is for small businesses to get a small business loan from a bank or other financial institutions. These small businesses are typically looking for money to expand or renovate their buildings, buy capital equipment or for working capital. The reality is that there are a significant amount of money available for small businesses. So why don’t small businesses get access to the much needed funds to grow their business? They make the following mistakes:
- Seek Funding from large banks: Large banks such as Bank of America, Chase or Wells Fargo are not lending to small businesses. They are trying to recover from the recent financial meltdown by investing their TARP dollars in stock, hedge funds or other risky assets to get outsized returns. They are also bracing for financial reform coming from the government by keeping more cash on hand. The one area they are not embracing is lending to small businesses.
- Do Not do enough research on regional and community banks: The small business action right now is with community and regional banks. These banks specialize in lending to businesses in their geographic region and tend to look beyond just the numbers to understand if a business is credit worthy. The only tricky issue is that government has been very aggressive about taking over and selling the assets of regional and community banks that were involved in the residential mortgage mess. So you have to be careful and know your bank before you apply for the loan.
- Small Business are not prepared for meeting with lenders: Many small business owners and principals are not financial people by training. Lenders look at the world through the window of financial statements. Many business owners do not have an understanding of their financial statements when they go to meet with their bankers. Many companies that would otherwise be eligible for a loan get so intimidated by the questions that they don’t follow-up and turn in an application. Meet with your accountant or print off your financial statements – last three years income statement and balance sheets at a minimum – before you meet with your banker. You should also be able to explain any glitches in the financial performance of your business over this time. If possible you should also have your financial statements updated to within 60 days of the meeting.
- Small Business owners do not understand basic lending criteria: Small business owners must understand the basic lending criteria used by banks and other financial institutions to make loans. First most lenders require that an organization have positive cashflow for at least the last two years. If you have a history of positive cashflow but had one bad year then you can still apply but need to have a good presentation of what happened and why it won’t happen again when you meet your banker. The best measures of cashflow are your net profits on your income statement and net cashflow on your statement of cashflows. You may also want create a projected income statement where you plugin the projected mortgage amount into your income statement. Your income statement should still be positive net profit after your inclusion of the mortgage amount. You can determine your mortgage amount by using a mortgage calculator such as this. If you are a start-up business you can still get a loan you will have to create financial projections and convince the lender that you will meet or exceed the projections.
- Small Business owners don’t submit their loan applications: Many credit worthy organizations go through the trouble of meeting with a lender but never submit their loan applications. We have met with a number of lenders and the most often cited reasons that small business owners do not submit their loan applications are: disorganized financial information, extreme time pressures and fear. Fear is the most common reason that the process ends after the first meeting. This is a shame because this inability to get comfortable with the lending process causes the company to lose access to funds which could be used to get a new building or purchase new capital equipment or replete inventory levels or hire new employees.