Earlier this morning I came across a list of things small business owners need to do to help them find greater success at the bank. Charles Green, of the Coleman Report, writes, “Small business lenders face the frequent frustrations of clients who live a life in a haze of financial mystery. ‘There’s money in the bank, so I must be earning a profit!’ Those words were actually said to me by some poor yahoo who mistakenly thought I was going to make him a loan. Wrong.”
I’ll admit, when I was running my own business, I don’t think I had the understanding I should have had either. Green’s article shares some advice I think everyone who owns a small business should be paying attention to.
- Keep you financial records up to date: Failure to do this is the number-one mistake made by small business owners. I used to push my bookkeeping duties off until the end of the day. Unfortunately, by then I was tired and would sometimes put them off until tomorrow. Were I to do it again, first thing in the morning I would be making sure my books were in order—when I was fresh.
- Don’t skip the annual budgeting and financial forecasting: With very small businesses, this probably seems like a silly exercise, but it isn’t. Because situations change almost daily in a small business, the annual forecast you make in December might be out of date by June, so I don’t know if I agree that an annual forecast is really relevant, I think it makes sense to set goals and forecast on a quarterly or semi-annual basis myself. Regardless of whether you do this annually, semi-annually, or quarterly, if you don’t set financial objectives and measure whether or not you meet them, you will never know if you’re growing or failing.
- Meet with an accountant and do it regularly: When many Main Street businesses are operating on a tight budget, it’s easy to look at this as ‘Just one more expense,’ but that would be looking at it the wrong way. Believe me, I know. Were I in my own business now, I’d meet with my accountant at least quarterly, if not more often.
- Make certain you are classifying your employees correctly: This is something the IRS is paying close attention to and is something you can’t ignore.
- Make sure you organize your business entity properly: Most small businesses are organized as an LLC (Limited Liability Company), S Corp, or Corporation. Unlike a sole proprietorship, the business becomes a second entity for tax and liability purposes. Filing only takes you half the way there though, once you establish your business entity, you have to treat it like a separate entity. I know of several businesses who neglected to do so and weren’t able to take advantage of the liability protection when problems came up (maybe this should be a discussion for a future post).
- Don’t mix personal and business expenses: If you’ve properly organized your business, using the business checking account to pay for personal expenses is a big no-no and could invalidate your corporate status—forfeiting any liability or tax benefits you might otherwise have been entitled to.
Crossing your ‘Ts’ and dotting your ‘Is’ in these categories gives your lender confidence you know what you’re doing and able to run a successful business. Remember, there are really only three things a lender wants to know about you:
- Can you repay the small business loan?
- Will you repay the small business loan?
- What will you do if things don’t go as planned?
The above list will help you demonstrate that you can repay the loan by illustrating that you are the kind of business owner that takes all the details of your business seriously.