As a small business grows, it’s almost inevitable that it will need some type of capital injection. Even if you’re doing everything right, there are times when your profit just isn’t enough to reinvest into the business to take advantage of new opportunities. Perhaps the company needs to hire more people, expand to a new location, or fulfill a large purchase order. As exciting as this growth can be, securing an investment can also be overwhelming. We meet and talk with small business owners every day who need capital to grow, but aren’t sure what lenders need or look for. Below are four tips from the small business lender to help you with securing a small business loan.
1. Know Your Needs
Before starting a conversation with a potential lender, it is important that a small business owner knows how much money the business needs, and what it will be used for. For example, if your company is asking for a $100,000 loan, be ready to provide a breakdown estimate of what the money will be used for. Breakdowns for the use of funds may include equipment purchases, working capital, tenant improvements, inventory, etc.
At PCV, we offer loans between $10,000 and $200,000. Sometimes, borrowers will ask for $200,000 because that’s the largest amount we provide. However, when talking through their needs with them more, they realize they don’t need the full $200,000, but rather $175,000 or even $100,000. You never want to add more debt to your balance sheet than necessary. And from the lender side, we also want to make sure that owners truly understand their needs.
2. Have Accurate Financials
Small business owners are often so busy with sales, marketing, and growing their companies that keeping track of their financials becomes a last priority. However, having accurate numbers for lenders to review is essential to the application process. The easiest way to get your financial statements ready for evaluation is to establish good bookkeeping practices early on. There are several easy ways to do this. One way is to use an accounting system like QuickBooks. But don’t worry if you’re still using Excel, or even keeping a ledger on paper. Another option is to hire a part-time bookkeeper to manage the process. With either method, you should be ready to pull a year-to-date profit and loss statement and recent balance sheet.
After the financial statements are collected, there are a few financial ratios to keep in mind. The first is the debt service coverage ratio (DSCR). The DSCR measures the cash flow available to pay your outstanding debt. Most lenders will want to see at least a 1:1 ratio to show that the company will be able to pay back the loan. Other financial analysis numbers to be aware of include debt to net worth, net worth, and the current ratio. A lender is likely to look at those when making a decision.
3. Be Ready with Due Diligence Items
Depending on what type of loan your small business is applying for, a lender will request additional due diligence items. These may include business taxes, personal taxes, personal financial statements, debt schedules, and financial projections. The best advice here is to have the company’s legal and financial documents complete and saved in a place that’s easy for disbursal.
4. Tell Your Story!
Lenders, particularly those that are mission-based like Pacific Community Ventures, really want to know you and your business. We want to understand what inspired your business idea in the first place, and how you plan to continue growing your passion in addition to your company. Why did you start your business? Who are your clients? Who are your employees? What is your growth strategy? What are your major accomplishments? Do you give back to the community? Stories and relationships matter.
For example, we had an applicant this past year who was a recent immigrant. Therefore, his credit score had not yet been established. For some financial institutions, this could be a reason not to make the loan. However, we learned that he sources directly from farmers in third-world countries, pays above fair-trade prices, and hires from disadvantaged communities. We were so inspired that we couldn’t help but make the loan!
We hope this helps. We’d love to hear about your own questions in accessing or applying for a small business loan.