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Five Critical Steps to Securing Small Business Capital
By Greg Lopez, SBA's Colorado District Director
Cash flow is the life blood of all small businesses. Cash flow allows
a business to make payroll, pay suppliers, and keep its doors open.
We have been told that there is a credit crunch and that small
business lenders are no longer extending lines of credit to their
customers. 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 blue ribbon panel of 12 experienced commercial
lenders to brief me on the current credit market, and to find ways to
help our small business community survive these turbulent economic
times.
All 12 lenders agree that capital is still readily available to credit
worthy small businesses. The lenders noted that they are performing
more due diligence on loan applications today then they did six months
or a year ago. I was told that in the current economic environment
small business borrowers are more wary to take on new debt, are
waiting for the results of the election 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.
My blue ribbon panel of lenders 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, multiple bounced
checks all show 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
blue ribbon panel of lenders 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 "I
need to understand that you understand what you are 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 business loan. Few, if any, lenders
provide 100 percent financing.
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 into a month by
month format. 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 10 percent, 20 percent, or 30 percent over the next 6 to 12
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 have 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.
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 maybe a mistake. Many
business owners make the mistake of cutting marketing expenses when
business slows. That might be the wrong decision to make.
Access to capital is critical to the survival of many small firms
across Colorado. 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 statewide leadership role
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 303-844-2607
X 401.
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