How to Finance Your BusinessA major key to the successful startup and expansion of your business is your ability to obtain financing. All businesses set goals for sales growth, profitability and pursue various strategic initiatives designed to enhance their customer or clients’ experience, but many small business owners quickly discover that finding financing is not always easy and often results in a frustrating experience. By arming yourself with proper information, knowing what a financial institution looks for when evaluating a loan request, planning, putting forth adequate time for preparation and setting realistic expectations, you can be successful in accomplishing your business financing needs.
A good financial institution can be one of the most important keys to making your business a success. In turn, a good financial institution’s role should be to help make your business successful. Take the time to establish a relationship with your financial institution. Small business owners who take the time to cultivate a relationship with their local financial institution long before they need a loan and treat that relationship as a long-term partnership will often experience the best results.
Keep in mind that your financial institution’s first priority is to recover the principal of the loan. Knowing the kind of credit you need and its impact on your business and using your business plan as a tool to communicate to your financial institution the impact of their loan on your business, will enhance your credibility and ultimately produce the best results for you and your business.
Where should you start? By establishing the key areas listed below, you will satisfy the information your financial institution places the most emphasis on when evaluating your business loan request.
Character: The financial institution decides if the client is trustworthy with regard to repaying the loan and generating a return on the investment. This is where the education and experience of the client comes into the picture. The loan officer considers your references and background in your industry. The bank’s experience with you is critical. The judgment on the character of an individual is based on past performance. Personal credit histories as well as business credit histories will be reviewed.
Capacity: Refers to the ability of the business to repay the loan. In your loan application, you must discuss exactly how and when you intend to repay the loan. Not only do you need to state your revenues and expenses but you also need to indicate the amount of your cash flows and the timing of your cash flows with regard to repayment.
Capital: Represents the owner’s investment in the business. Before applying for a loan, the owner should have an investment in the business before a financial institution considers making an additional investment via a business loan.
Collateral: Collateral is a secondary source of loan repayment. We want the loan repaid from operating profits so you become a bigger, better borrower and depositor. But just in case things go sour, a bit of collateral makes your lender sleep better at night.
Conditions: Economic conditions —local, regional and national — have a profound effect on credit decisions. If the financial institution is persuaded that a depression is coming, it won’t extend credit easily.
Contingency plan: A contingency plan is a useful financing tool. Lenders like to see that you look ahead. A contingency plan proves forethought. A contingency plan is a short, worst-case business plan that examines the options that would be open to the business and how those options would be treated. Decisions made in panic are poor decisions. A contingency plan avoids panic for both you and your lender.
| ||Jeffrey S. Benson is the President and CEO of CASE Credit Union. Established in 1936 by Lansing area educators, CASE Credit Union is a full-service financial institution serving 30,000 members and managing more than $228 million in assets.|