Whether you’re a seasoned small business pro or just starting your first business, finding financing is always a challenge. In today’s tight lending environment, financing is especially difficult. However, there are some things you need to be doing to increase your chances of being accepted for a loan.
Because of all the bankruptcies, foreclosures, and loans that weren’t repaid during the Great Recession, banks remain reluctant about making loans that show any risk at all. Banks look for borrowers with strong assets securing the loan. People that don’t even need the loan.
What Bankers’ Want
Having a business plan demonstrating your business will quickly become profitable is not enough in today’s economy. Before a bank will make a business loan to you, they want you to pledge other business assets or personal collateral to secure the loan. Additionally, banks want to see that you have sufficient financial reserves to weather any business storms that may appear on the horizon – time when cash flow won’t cover expenses.
Before making a loan, bankers also like to see that you’ve been successful in the same business or a similar business before. Sorry, but qualifying for a loan in today’s soft economy is very difficult for beginning entrepreneurs. However, banks still need to make loans to make money and that means they have to bend their own rules sometimes.
What Banker’s Will Accept
Banks will make exceptions such as substituting management experience for ownership of a previous similar business. In a few instances, they’ll even accept profitable management experience in a different industry. Another approach is when you can demonstrate to the bank that other people on your team have also been successful in a related business. Additionally, banker’s are going to want your personal guarantee of the loan. That means cleaning up as many discrepancies in your credit history as possible before applying for the loan.
All of this and more goes into your carefully crafted business plan. Your business plan needs to focus on “how much money you need” never “how much money can you borrow”. The plan also needs to explain in detail exactly how the money will be used. The two major categories banks consider for loans are “working capital” and “expansion capital”. Working capital is money you need to operate the business during slow periods and will repay the loan when business is good. Expansion capital is to grow your business. Your business plan needs to show that by expanding, you’ll increase profits sufficiently to repay the loan.
Alternative Money Sources
Loans from family and friends is one alternative. However, this is not a good idea if your want to assure being invited to the table for future holiday dinners. Instead, look to people with retirement savings that want to earn a higher interest rate than banks offer but don’t want the risks associated with fluctuating stock markets.
Another source of financing are angle investors. These are wealthy individuals that often have sold a successful startup business and are looking for a place to invest their money. Typical investments start at around £250,000 and go up. One important thing to be aware of is these are not usually loans. These are investments. Angle investors become part owners of your business.
Further up the food chain are hedge funds. These investments usually start at £1,000,000. Again, this is for part ownership of your business. However, both angle investors and hedge funds often come with exceptional business knowledge, experience, and insider contacts that can be very beneficial to your business. As owners, they will take an active role in managing your business.