Want to start a business but afraid you can't get financing? Credit may not be as plentiful as it was before the financial crisis, but loans are still out there for small business owners who do their homework, according to Sabrina Parsons, CEO of Palo Alto Software, which makes software tools to help small businesses track their finances. If you want to launch, expand, or help finance your business, try these steps:
1. Take a test drive.
Before you go through the considerable bureaucratic hassle of applying for a small business loan, you can get a good read as to whether you'll get one, Parsons says. Visit one of the SBA's Small Business Development Centers for free guidance as to how best to present your information and whether you're likely to get a loan.
2. Prepare a business plan and financial documents.
It'll be tougher to get a loan if your business hasn't opened its doors yet, Parsons says. If your business is up and running even in a small way, prepare some cash flow sheets that show you understand where the money's coming from. If you've run a successful business in the past, that information will help too. Either way, do take the time to prepare a business plan. "Not some 55-page thing, but something that will show you have a good understanding of your business and market, a high-level strategy, and a financial projection." Ultimately, she says, a human being will make the yes or no decision on your loan, and without solid documentation the answer will likely be no, even if everything else looks good.
3. Get your personal finances in order.
"Personal background is often a problem," Parsons notes. That's because the bank is betting on you just as it would be for a personal loan, so your past credit performance will matter. Now is the time to pull your free credit reports from www.annualcreditreport.com. If there are delinquencies or other negative information that doesn't belong, dispute them, and try to pay off any outstanding loans, including credit cards. If the problem is that you haven't used much credit (which can give you a low credit score) take out a credit card or two, use it once a month or so, and pay the bill promptly. Or try another option: Bring in a business partner with better credit than yours.
4. Try a community bank.
"Community banks can be better than big commercial banks," Parsons says. For one thing, loan officers are likely to have more decision-making power, and are less firmly bound by algorithms than they would be in a large bank. But not all community banks are equal, she says. You want one that is actively pursuing small business customers. Check out the bank's marketing materials and the financial information on its website to get a clue. "If only 2 percent of their customers are small businesses, that probably won't work for you," Parsons says.
5. Consider a line of credit.
With a loan, you get a lump sum from the bank, usually for a specific purpose such as opening a new store or expanding an existing one. You pay it back over time from the increased profits at your new or larger location. A line of credit is more like a credit card: You use it when you need it, for instance if you get a large order from a B2B customer and need to buy materials but won't have cash till 30 days after you deliver the finished product. A line of credit is better for keeping your business running day-to-day, and easier to obtain as well, Parsons says.
6. Don't wait till you need it.
The old adage about how banks only lend to those who don't need their money has some truth to it. More to the point, if you wait till you can't make payroll it'll be difficult for the bank to help you since they generally can't lend to companies at risk of going bankrupt or ceasing operations. Instead, pay close attention to your projections so that you'll know ahead of time if you're going to hit a cash crunch. "If you tell the bank 'Business is really good, but I'm collecting every 60 days instead of every 30 days,' they're more likely to extend your credit," Parsons says.
Too many small business owners wait too long. "Sixty percent of small businesses that fail are profitable when they fail," she adds. "They just don't have the cash flow."