A lot is written about getting financing for your business, especially loans. But too little attention, in my view, is given to laying the foundation for getting a loan.
That’s not surprising. After all, most of us don’t think about a loan until we need one. But seeking a loan in today’s environment is like looking for a job when the job market is poor. When hiring is down, you will have fewer choices - and if you’re desperate it will show. Same goes for looking for a loan when the finance market is tight, as it is now. You’ll have a much better chance at success on your own terms if you are confident – and you’ll have to be more creative and work harder.
And, just like looking for a job, the time to lay the foundation for getting a loan is when you don’t actually need one. Focus on these 3 steps for laying a good foundation for your loan request:
1. Get your personal financial statement and your business financials in order. I know this sounds like the basics. And it is! But you need every edge today. So if you are behind on keeping your accounting records up to date, you won’t be able to run a recent P&L or provide other recent financials. And if you don’t have a personal financial statement in order, you will be running around trying to pull everything together at the last minute. If there are delays in providing such essential information it may make you look like you are disorganized – and then what does that say about your ability to repay a loan?
2. Clean up and improve your credit report and credit score. You may think there’s nothing you can do to “clean up your credit report” or improve your score. But that’s not strictly true. First, you can check your record (both personal and business credit) to make sure your credit report is not showing any errors . If errors show up, get them corrected. It’s not unusual to see closed accounts still showing open balances – and that’s just one example. Second, pay down on your credit cards or other accounts – when you are maxed out or near to maxed out on the credit limit, it affects your credit rating negatively. Third, make sure you even have a business credit record. A surprising number of small businesses do not have ANY business credit record. And what if you don’t? D&B offers a tutorial for how to build a business credit record. Some of the things you can do are to open business checking and trade accounts. You can also establish a business credit rating with Dun & Bradstreet by following their process. The time to work on your credit ratings is BEFORE you are desperate for a loan.
3. Develop a relationship with a local banker in a local lending institution – now! Go to a small community bank or other lending institution that advertises that it serves small businesses. Why? Because community banks and local lenders are the ones making the most loans today. With a smaller local institution, you’ll have a better chance of communicating directly with loan decision makers. Open up a checking account and possibly other accounts (billpay, savings and credit card). Get to know the local small business banker or loan officer. Take the time to educate him or her a bit about your business. When I decided to look for a loan, I did some old fashioned networking. I set up a meeting with the small biz banker, explained my business, showed him tangible evidence of some of our successes (such as awards we’d won), and gave him an autographed copy of my book for the office (solely to educate him as to my credentials and high profile in my industry). In my case, it was necessary because while my company is known nationally, we don’t have a significant local presence. You wouldn’t try to make a big sale without taking some time to be persuasive and sell the benefits of your product or service. The same concept applies when asking for a loan - you have to “sell” yourself, your business and your combined credibility.
Will these 3 steps guarantee that you get a loan? Of course not – no one can give you guarantees like that. But they will increase the odds of you being able to secure a business loan, especially today.