When looking for a small business loan, a quick search on the Internet will yield a lot of advice. And, much of it will be pretty good. Ultimately though, I think lenders really want to know three things.
- Can you pay? They don’t ask it this way. What they will ask is to see your monthly or annual revenues, your profit and loss statement, six months or more of you business checking account, and the details of any other income you might have. This is one of the big reasons it’s so tough for idea-stage or very young entrepreneurs to get financing. Unlike a venture capitalist or angel (who is looking at a big financial payoff at some point down the road when your business is either sold or goes public, your banker or other lender needs to confirm that you have the financial resources to pay your loan payment—a payment that is often due next month. No income and no ability to generate income today tells the lender you won’t be able to pay tomorrow.
- Will you pay? This is why lenders want to see your credit score. Most lenders understand the last few years have been tough on small business. They are even willing to sometimes forgive a business that was struggling, but has put things back together now. Like it or not, they look at your credit score as an indication of your willingness to pay. In many cases, there is a difference between your ability to pay and your willingness to pay. If you have a bad credit score, unless there are a bunch of errors on the report, it’s time that will heal that wound. There is no shortcut or easy answer—other than get current and stay current. Paying diligent head to how timely you meet your business and personal obligations will make a big different. In six months, you can see your credit score go up as much as 100 points.
- What if you don’t pay? This is why lenders like collateral. Although seizing your collateral will help sooth the sting of your default, it seldom allows the lender to recoup all of their loss. The last thing a lender wants to do is seize the property, real estate, or other valuable collateral you put up to guarantee the loan. I sometimes hear from borrowers lamenting the loss of their collateral when they find themselves in default. Maybe they’ve mortgaged their home or the building where they do business and are now scrambling to try and keep the property they put up as collateral. Although there are some lenders who might try to help you, in most cases your collateral will be lost. My Grandma used to say, “If you can’t stand the heat, get out of the kitchen.” I think that applies here too. If you can’t stand to lose your collateral, don’t use it as collateral. And yes, that might mean you’ll need to figure out another way to get the money you need—or do without all together.
If you can show the bank that you can and will make timely payments—and have collateral to back it up, getting a small business loan is much easier. With that in mind, before you go into the bank or meet with any other lender ask yourself: Can I pay? Will I pay? And can I afford to lose my collateral if I don’t?