12 How To Match Your Business Needs To A Bank’s Expectations
Obtaining capital to fortify and grow a small business remains one of the toughest challenges small-business owners encounter. According to a 2023 National Small Business Association survey, over half of small businesses cannot access adequate financing. Unfortunately, as that survey found, the most common way small-business owners borrow money for capital needs is through credit cards. The lack of financing on favorable terms hinders businesses. As companies expand, they typically need regular financing throughout their life cycles. Without bank loans, businesses can wither under high credit card interest rates, failing to meet the owners’ visions for growth and profitability.Richard Gusmano is the Founder and CEO of Business Credit Consultants, a digital financial consulting practice for small business owners.
Become your own CFO.
Banks lend to people, not to numbers. However, banks are more likely to lend to people who know their numbers.A common mistake business owners make is recusing themselves from their financials by relying too heavily on their accountants to advise on fiscal matters. This can be problematic as accountants are routinely directed to reduce earnings (to mitigate tax exposure). Accordingly, your CPA will likely not be as focused on showing the strength of earnings in your business that a bank would find appealing. Accountants, who are often inundated around tax deadlines, may also tend to fall back on the general rules rather than seek to understand the business strategy and long-term vision.
Meanwhile, business owners are often too entrenched in daily operations to keep up with their business’s accounting. They may know the ins and outs of the general ledger, but may become too busy to keep up with recording simple, important line-item assets to balance liabilities in a way that supports the business’s creditworthiness.
The demands of business ownership are often the reason why accountants are hired in the first place, but a savvy business owner remains firmly in control of the basic numbers.
At a minimum, becoming your own chief investment officer involves:
• The ability to communicate profitability over time and any upward or downward trends in revenues and expenses.
• The ability to walk through your business’s profit and loss statement and balance sheet and explain any discrepancy among the assets and liabilities.
Present your business case to the bank the right way, at the right time.
When seeking a loan, first impressions are important. Having a plan for the capital is common sense, but business owners often hesitate to fully disclose what the capital will be used for. If the loan is used for hiring, the application should disclose the number of people being hired, the costs of training the employees and how the return on the additional staff will be realized.The timing of a loan application can also impact how a bank views a company. Understanding and considering a business’s seasonality can be the difference between presenting a business that looks like it is in a downward trend or is experiencing an upswing. The timing of large annual expenses, such as licensing or conference expenses, and key employee leaves of absence should also be considered. If capital must be obtained at inopportune times, be prepared to address any seasonal effects of your business, and back it up with data.
Work with the right banks.
Banks change their lending programs and debt exposures often, so it can be difficult for small-business owners to find a bank with a program that is actively supporting and lending to their industry. Some of this is out of a business owner’s control. However, too many business owners rely on what’s convenient—applying only at banks they are familiar with or have accounts with. Once the bank issues a denial, the business owner may believe that the company won’t qualify anywhere else for the required capital.Business owners should be proactive and ask questions about a bank’s lending practices before applying. Owners can speak to bank representatives and inquire about what type of businesses the bank is currently lending to. Unfortunately, it may be difficult to find the right representative at a bank who can answer lending program questions, and this information is usually not found online. In these cases, it can be helpful for owners to check in with their industry network or work with a business lending consultant to ensure they find the right banks to work with.
Businesses should not have to rely on credit cards or “quick funds” that cripple cash flow to meet their capital needs. It takes some strategic planning and a proactive approach, but small businesses can break free from reliance on less-than-ideal funding. Access to favorable capital is necessary for sustained success, and it’s worth the effort to garner the information and data to meet the expectations of banks that can deliver owners more favorable terms.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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