How To Secure Business Loans

“Business Loans For Small and Medium Sized Business Are Secured By Preparation and Presentation”

There is an abundance of information on the web telling you how to game the system to secure a business loan or business credit, or how if you buy this book or pay this fee in advance, even the most clueless business person, or wannabe business owner, with the worst credit can secure business financing in no time flat.

Come on!

Yes, there are certainly ways to game the system. And you can get away with some sneaky credit application strategies that can get you lines of credit and term loans.

But like any loan, if you don’t have a solid plan to pay it back, you’re going to go into default on your repayment obligations and then what?

The path to financing a new or existing business starts with preparation. All businesses carry risk, and the people who lend out money want it back plus a return. So the inherent risks associated with any venture need to be understood and managed or why would anyone in their right mind issue a business loan?

For those that do issue questionable business loans, they don’t tend to do it for very long as risk catches up to the borrowers and the lenders portfolio turns to dust supporting the saying that a fool and his money are soon parted.

Preparation also helps the borrower better understand what he or she is getting into and perhaps may end up talking themselves out of getting a loan once they stand at a place where a truly informed decision is being made.

Unfortunately for many, preparation takes work and its far easier to plow ahead with an idea versus a well thought out strategy and tactical execution plan, find any source of money that can be had, and give it a go.

Good luck with that approach.

The other side of preparation is presentation. A lender or investor not only want to see that you thoroughly understand your own business or business opportunity, they also want you to convey the information in a form that they understand and can easily relate to.

Too often presentations provide excessive opportunities for lenders or investors to make assumptions or draw conclusions that may not be accurate or valid. This is a great way for an otherwise “finance-able” business loan request to get turned down.

Business loans aren’t easy to secure most of the time. There is art and science involved in the process of business financing procurement. Short cuts tend to lead to disaster more often than to success.

If you’re planning to be in business for the long haul, then its important to learn about, and constantly become better at, business loan preparation and presentation.

Click Here To Speak To Business Financing Specialist Brent Finlay

Small Business Financing Is Mostly Personal Financing

What’s The Difference Between Business & Personal Financing

For small businesses, there isn’t much if any difference between the two.

There are a couple of  key reasons for this.

From a credit point of view, small businesses, especially new ones, don’t have much in the way of business credit established.  So lenders will rely on personal credit scores and histories to make business financing decisions.

Even if a small business has been in existence for several years, there still is no guarantee that any amount of business credit will have been established due to the fact that a business credit history is developed by transacting with companies that not only offer credit terms, but also report outstanding credit to credit reporting agencies.  Many small businesses either don’t utilize much supplier credit, or way only work with suppliers that are too small to be actively reporting to credit agencies.  The result in both cases is that business credit does not build much over time.

From a guarantee point of view, most small business financing facilities will require a guarantee from either the business itself or the owners of the business.  If the business itself does not have sufficient retained earnings to provide meaningful value to a guarantee, then a personal guarantee will be required.

Many business owners get frustrated with the fact that even though they are incorporated, they still have to open themselves up to liability personally by having to provide personal guarantees to secure business loans.  Unfortunately, incorporation can be more important for tax reasons than liability protection, especially when it comes to securing business capital.

Over time, as the business earns profits and grows its retained earnings, then personal covenants and guarantees may not be required and can even be removed from existing financing facilities.

The key though is to increase the value of the businesses ability to repay debt obligations.  If the owners are always striping out the available cash from the business, then the personal guarantees will likely continue to be required due to the fact that the personal side is where all the equity value is being held.

How Important Is Personal Credit To Business Financing?

What Type Of Impact Does Business Credit And Personal Credit Have On Business Financing Decisions?

First of all, business financing decisions for debt capital tend to limit credit assessments to business credit if there are no personal guarantees required by business owners, shareholders, or third parties.  However, this is not an absolute rule, and in many cases, personal credit still creeps into the decision making process.

Why?

Because personal credit is a form of character assessment, reflecting how an individual carries through on the commitments he or she makes.

There may be ample financial support for debt financing, but a poor personal credit track record of a major owner of a business can still lead to an application decline.

In cases where the security offered by a business and any required covenants are not sufficient to secure the lender, then personal credit becomes even more of a major factor in credit decisions.

The third scenario when personal credit comes into play with business financing is when the business itself has very little or no established credit.  This can be very common with businesses under 3 years in existence and also in older businesses that work with smaller suppliers than don’t report their results to credit reporting agencies.

While I can follow the logic of utilizing personal credit reports when assessing business financing requests, the practice is far from reliable due to inaccuracies in personal credit reports.  Remember that the personal credit reporting agencies do verify the information placed in your credit report, so any errors can potentially impact a business financing credit decision for a business loan you may apply for.

This is yet another reason to regularly check you credit report for errors and take the time to make it as accurate as possible.