A recent blog post in Forbes business magazine by Sageworks offers some practical advice for small business owners considering a bank loan.
Small businesses, both locally here in the San Francisco Bay Area as well as nationally, are expecting continued growth in 2016. According to the Pepperdine Private Capital Access Index report cited in the article, 83% of businesses are confident in growing in 2016 with an average growth of almost 9% in annual sales.
Usually, company growth requires capital to help fuel expansion in order to manage cash flow, inventory, receivables, payables, or other pressures. Unfortunately, small businesses are still finding it difficult to find bank financing. The U.S. Small Business Administration (SBA) estimates that 80% of small businesses had their loan applications rejected.
The blog post had 5 general pieces of advice for small business owners to help them with the bank loan application process:
Be careful of the recent trend in online lenders: “The idea of an upstart online lender may appeal, but credit applicants have reported the most success and satisfaction with their borrowing experience at banks, particularly small banks. Nonbank online lenders had the lowest borrower satisfaction rates despite relatively high approval rates, mostly because of concerns with high interest rates and unfavorable repayment terms.”
Bank applications are more streamlined: Due to new regulations and increased competition, many banks have invested in order to make it easier to apply online. In addition, they
Maintain good financial statements: “You need financial records and probably a down payment. Business owners seeking loans are often surprised that a cash down payment of around 20 percent is typically needed. If you are used to putting down 3 percent to purchase a house or nothing to purchase a car, you may not realize that lenders require some “skin in the game” for a business loan. Similarly, lenders will want to see up to three years of financial records and any projections you have (personal tax returns, business tax returns, income statement and balance sheets, purchase orders, K-1 statements). Don’t forget to clarify any personal debt that is actually for business purposes. Otherwise, some banks might double-count a credit card used for the business if it shows up on a personal credit check and also is included in the business’s tax return.”
Cash flow is king: Banks look at the P&L (revenues, expenses, profits, margins, etc.), Balance Sheet (assets, liabilities), and especially Cash Flow. Whatever debt the company obtains needs to be paid back out of cash flow.
Don’t reduce taxable income too much: “Business owners need to be talking with their accountant about the implications of the way they file their taxes…. For example, if they’re going to be using deductions, see if there are some that could be tied to depreciation. Banks’ loan decisions are typically based on EBITDA [earnings before interest, taxes, depreciation and amortization], so if you can write off something as a depreciable asset for tax purposes, that will help reduce taxable income but will also keep your cash flow at a good level.”