It’s no secret that small businesses can have a hard time getting financing. So before you approach lenders, make sure you ask yourself: how can I maximize my chances of getting credit approval?
Here are five simple things you can do to up the odds of getting your funding approved.
- Demonstrate that your business generates steady cash flow.
Cash is still king and is also a key predictor of a business’ health and prospects for the future. By being able to demonstrate you have ample and/or steady cash flow, you are ensuring to potential financers that you have plenty of money to pay creditors, employees and others on time. Make sure to be clear and show your financer what predictable cash flow you have coming in. Demonstrate this by being ready to provide financials statements, tax returns, and bank statements. These documents provide the financer with a historical perspective of the performance and liquidity of the business. Anticipate questions about fluctuations in cash flow: if cash flow dipped because of the recession or the loss of a customer, provide an explanation in advance.
- Maintain a manageable debt load.
Debt load is the amount of debt that is carried on your balance sheet. You need to be able to demonstrate you can not only handle your current debt load but also the additional debt repayment your proposed financing will cause. If you want to incur the debt for expanding your business be prepared to demonstrate why this additional debt will be beneficial. For example, show how the added liquidity will be used, and forecast the additional revenue that will be derived as a result of the infusion of cash. The use of proceeds from the loan is a critical point of information for the financer.
- Sustain a positive payment history.
One of the most important factors for any financer to weigh is a business’ payment history. A financer needs to see that a business has a record of paying down debt, and on time. A financer may have obtained a third party credit report on your business, such as a Dun & Bradstreet report. Ask to see the report to verify that it is accurate. The report may not mention your significant trade partners and other lenders who would provide a good reference, and confirm your good payment history. You can demonstrate this by providing these references, and be sure to include the contact information for the person you deal with at your bank, trade supplier, etc.
- Prove business judgment.
Potential lenders want to be assured that you anticipate potential challenges and have a plan in place as to how to address these challenges. Furthermore, lenders are also interested to see that you have the management in place necessary to overcome any obstacles that might come your way. If possible, have a business plan that you can show financers. The business plan should contain a forecast for your business with at least two scenarios: how you expect your business to perform if you don’t get approved for financing, and how it will perform if you do.
- Shop around for financing.
Don’t assume your bank or the vendor will offer the best terms. Compare rates, lease terms, fees and options and use only established financing providers.