Five Critical Steps to Securing Small Business Capital

Cash flow is the life blood of all small businesses. Without it, a business may have difficulty in meeting payroll, paying suppliers, and just keeping its doors open. Businesses often depend on small business loans to assist with their working capital needs to meet these daily obligations. Lately, we’ve heard that due to the nation’s lagging economy and the “credit crisis” businesses don’t have the same access to small business loans they used to. As this state’s strongest advocate for the small business community, I believe it is critical to understand the true facts about small business’ access to capital in the current economic climate. Recently, I assembled a panel of experienced commercial lenders to brief me on Montana’s current credit market, and to find ways to help our small business community survive these turbulent economic times.

By Michelle Johnston, SBA’s District Director

All lenders agreed that capital is still readily available to credit worthy small businesses. The lenders noted that they are looking at collateral values more closely and placing extra emphasis on the management capabilities of the applicants and the financial procedures of the business. I was told that in the current economic environment small business borrowers are more wary to take on new debt, are looking at the change in administrations before making crucial business decisions, and have seen their revenues and liquidity drop severely over the last few months. Business owners that are too highly leveraged may have difficulty taking on new debt, even if that debt is critical to the survival of the business. The panel did indicate that they have not seen a decline in the personal creditworthiness of their applicants, as has been the case in other parts of the country, and that their clients are good borrowers with strong character and they continue to pay their debts and obligations despite the downturn in the economy.

My lender advisory panel provided me with five critical steps that small business owners can do to help secure capital.

1. Borrowers must be credit worthy. Small business owners must avoid depleting their current liquidity or cash position. They must immediately deal with negative financial issues including poor or inaccurate credit reports, and must resolve all business and personal tax issues. A negative credit report and/or credit score can be a “deal buster.” Back taxes, liens, garnishments, and multiple bounced checks all show an increased risk for a lender. Borrowers should deal with recent bankruptcies by providing an explanation of why it occurred. Address all of these issues prior to applying for the business loan.

2. Immediately develop a stronger business plan. The panel stressed that a business plan must be well thought out and realistic. The business plan should outline the money, management, and marketing of a business. One lender stated that he needed to know that the borrower understood what he was getting into. Borrowers must explain how the money will be used, and how will it be repaid. Repayment ability is the critical factor. Without repayment ability, no lender will make the loan. Few, if any, lenders provide 100 percent financing. Borrowers who currently do not have a strong business plan need to seek out assistance and utilize the Small Business Administration’s resource partners including SCORE and the Small Business Development Centers. There are several training and technical assistance opportunities offered by local Small Business Development Centers and SCORE that small business borrowers should be taking advantage of.

3. Plan for the worst case scenario. All lenders require borrowers to provide a minimum of 12 months of financial projections. These projections should be broken down by month. The business owner must understand how these assumptions were developed and establish their validity. All lenders agree that the projections must be presented with a best case, mid-case, and worst case scenario. How will the business survive if revenues nose dive by ten percent, 20 percent, or 30 percent over the next six to twelve months? There are no crystal balls or Ouija boards to answer this question. This “hands-on” forecasting will help the borrower become more strategic in their thinking, and help the lender feel more comfortable with repayment ability.

4. Two Years Business History is necessary. Our lenders made it absolutely clear that they were looking for established, financially strong, quality businesses to lend to. Working capital loans are becoming harder to approve, and lines of credit were being tightened or not extended. Loans to start-up businesses are more difficult to approve in the current economic climate. Lenders may require an additional cash equity injection by the owner, or even a seller carry back, to reduce the size of the loan. A proven franchise concept may help mitigate any risk. Lenders are focusing more closely on management capabilities as well as the financial and accounting practices of the small business. They need to know that the business is being well managed and has a strong grasp on their whole financial picture.

5. Time to become a hands-on owner. This is not a time for business as usual.

· Collect accounts receivables in a timely manner – don’t allow your customers to drag out the payment terms. If necessary, get in your car and visit the customers that have not paid timely and have large amounts of outstanding money owed to you.

· Don’t keep all your cash liquidity tied up in inventory. Review your business operations to see what work can be handled in-house and not contracted out.

· Review each business expense item and eliminate discretionary expenses that could help generate additional cash flow.

· Eliminating unprofitable account relationships could also help the bottom line. Increase your efforts to market your business.

· Cutting new marketing expenditures may be a mistake. Many business owners make the mistake of cutting marketing expenses when business slows and that might be the wrong decision.

Access to capital is critical to the survival of many small firms across Montana. This is especially true given the upcoming holiday shopping season. Though small business loans are still being made to credit worthy borrowers, many business owners do not comprehend what lenders require in a loan application. Their chances of securing a loan are better if they follow our Five Critical Steps to Securing Small Business Capital. The SBA has taken a leadership role statewide in advocating for the small business community during these uncertain economic times. The SBA remains committed to helping our small businesses weather the economic storm and prepare for brighter days ahead. Small business owners that have questions about obtaining a loan, or need assistance with other business issues, should contact our newly established Small Business Economic Hotline at 406.441.1095.