Small Business Borrowing

Mar 13, 2010

Small businesses in today’s economy have found that the rules associated with borrowing money from a Bank have changed significantly in the past two years.  It’s no longer a simple matter of bringing you prior year’s tax return into you bank and acquiring the funds you require.


Fortunately, banks are still lending.  Small banks, in particular, still have funds available for loan to small business owners.  It’s a matter of proving to the bank that you are creditworthy.  This requires some preparation on your part.


You need to have a business plan.  A well written business plan will help you in communicating to others that you know what you’re doing, where you want to be, and that you’ve done enough research.  You need to include information about your products or services, the industry analysis you’ve completed, and you will need good financial data.


Bankers will be looking at certain aspects of your financial plan very carefully.  They will want to see your prior year tax return, and they will review your personal credit rating.  Beyond those things, though, the banker will need to see historical financial statements to establish credibility for the business.  These financial statements will include actual historical results as well as forward looking projections (typically 2-3 years).  You will need to provide an income statement, balance sheet and cash flow statement.  The projections are important because they will illustrate your anticipated cash shortfall and will help the banker understand and document the amount needed and the specific intended use of the funds.  It’s critical that you are able to show the banker how you intend to use the funds. 


Don’t be surprised if you are asked to provide a Global Cash Position that reflects not only the business for which you are seeking a loan, but your personal net worth and any other companies you may own as well.  A banker today will want to take a deeper look into your overall liquidity rather than limiting their review to the individual business you are presenting in your request for funds.


It is also likely that the banker will want to ensure that you have some “skin in the game”.  In other words, if you anticipate needing $1M to reach breakeven, the banker may ask you to cover $100-200k with your personal funds.


Your personal credibility will be a factor too.  It’s easier to qualify for a loan if you have been doing business with the bank for a period of time and have a relationship with your banker.  A long time client who already has a good relationship with their bank is in a much better position to request a loan than a brand new customer who has no history with the bank or banker.


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