Is Your Business Bankable? But, before you run off to start problems that can be explained writing your Business Plan, you by a one-time incident such as a This is one of the most need to seriously consider medical problem, provide important questions a startup or answers to the following information to the prospective existing business will have to questions. You must not lender concerning the problem address. Simply stated, a automatically assume that you and how it has been resolved. business is bankable if it can will qualify for or obtain a obtain all or a majority of the business loan. The questions in If you have filed bankruptcy in financing it needs from a this self-test quiz are designed the last seven (7) years (ten (10) commercial lender. to provide you with an years for an SBA loan), or have understanding of important slow payments, collections or Most small business owners information that lenders need to other credit problems then it require some degree of consider when making small may be difficult to obtain financing for their business with business loan decisions. financing now. You may have a majority of small business Understanding the various to “repair” your credit history financing coming from personal factors used from a lender’s and rebuild your credit track resources, family and friends, prospective, whether it be a record before proceeding with and small business loans. Small Small Business Administration your business plan. business loans are obtained by (SBA) loan or a traditional bank working with a lender usually a loan is an important first step Have you filed and paid all local commercial bank or non- you need to take and understand taxes due for personal and/or bank lender interested in before proceeding with your business tax returns? working with you on your plans. project. Many of the loan programs Do you have a good personal available are in partnership with There are many myths about the credit history? various government agencies. availability of grants for small As a result, loan program businesses. Many potential When a lender makes a decision coordinators do not look small business owners are under on a small business loan, the favorably on individuals or the false impression that grants personal credit history of the businesses who have unpaid are available for starting a small borrower will be considered. income and/or business taxes. business. Grant money is Research indicates that a good SBA loans require an income normally not available for personal credit history is one of tax verification be obtained starting a business. In some the most important factors in from the IRS as part of the loan very specific cases, there may identifying borrowers who will closure procedure. be cost share or grant programs repay their business loans. If available to existing small you don’t pay your bills, what Do you have money of your businesses in a particular comfort does a prospective own to invest in your industry serving a specific lender have that you will repay business? purpose. Non-Profit his/her loan? organizations established under (For Startup businesses) IRS Code Section 501(c)(3) are You should request a recent All loan programs including the most likely candidates to credit report so there are no SBA loans require that the receive grants. surprises or disappointments business owner invest in his when the lender reviews your own business. After all, if the Communicating your business credit history. You can order a business owner is not willing to plans or project to a prospective credit report from any one of the invest in the business, why lender is done with a Business three major credit reporting should anyone else. The Plan for a new or existing agencies by contacting owner’s equity position sends a business. This document is www.annualcreditreport.com. If message that the owner has a considered to be the primary you discover errors on the credit strong belief in his business and means for the purpose of report, this will give you an is willing to risk his/her own obtaining a business loan. opportunity and time to resolve money to fund the business’s them. If you have credit success. The greater the equity 1 position, the more favorably must be able to convincingly A business with too much debt potential lenders will view the demonstrate your ability to uses profits and valuable cash loan request. As a general rule, make timely loan payments. To flow to service (pay) loans a 20% or more equity do this, you will need to write a rather than building retained investment should be business plan which provides earnings and working capital for considered. Keep in mind, you with an organized way to future business expansion. neither a bank nor the SBA research critical areas of your Lenders look more favorably at provide 100% financing so you business, one of which is your loan requests that do not overly will be expected to make up the cash flow projections. In order burden the business with too difference. to lend credibility to your cash much debt. Banks often desire a flow projections, you will need debt to equity ratio of 3:1 or less Does your business have a to research comparable (total liabilities divided by positive net worth? businesses to prove the equity) to mitigate the financial reasonableness of your risk of the business not being (For Existing businesses) projected revenue and expenses able to service its debt. Lenders want to see a positive which are used to formulate net worth. It confirms that the cash flow projections. There Are you willing to personally business has the ability to must be enough cash flow guarantee a loan? produce profits and positive generated from your business to cash flow. It’s not unusual for a not only repay the new loan but Most business owners are business to have loans from its also provide sufficient working requested to personally shareholders on the balance capital to sustain the business. guarantee their business loans sheet. However, if these loans regardless of the legal structure are subordinated and not paid The Small Business of the business. A guarantee back to shareholders while you Development Center (“SBDC”) strengthens the borrower’s make bank loan payments, they can provide consulting and commitment to repay the loan may be considered as part of various training seminars to while providing the lender with your equity. assist you in this process. a higher comfort level that the loan will be repaid. Can you demonstrate that Do you have collateral to your business has the ability secure a business loan? to repay the loan? Do you have experience in Your personal and business running your own business? (For Existing businesses) assets can be used as collateral A business that is profitable and to secure repayment of a (For Startup businesses) cash flow positive will find it business loan in the event the It’s important for a business easier to demonstrate its ability business defaults on the loan. owner to have experience in the to repay a new business loan. Collateral is valued at an industry or business. As an This will need to be evident in amount that is less than market alternative, entrepreneurial the cash flow projections which value for a variety of reasons. experience is a valued are included in a Loan Proposal. The more collateral you have to substitute. There will be many On the other hand, a business offer, the more likely a loan new challenges facing a Startup not showing a profit and having request will be favorably business owner so having the weak cash flow will need to considered. On the other hand, experience of having confronted prove that it can be profitable unwillingness to pledge assets and solved similar challenges and cash flow positive to the as collateral or a lack of will be invaluable to the Startup extent necessary to not only collateral to offer can be a business owner. repay the new loan but also reason for declining a business provide sufficient working loan request. Does your business have capital to sustain the business. business advisors? Does your business currently (For Startup businesses) have low levels of debt? (For Existing businesses) Repayment of a business loan is As the business grows, the very important to a lender. You (For Existing businesses) business owner will be faced 2 with a need to become more funded in part by the U.S. Small Business sophisticated in his management Administration. of the business. Growth requires more attention to such areas as strategic planning, marketing, recordkeeping, inventory control, personnel and financing. Trusted advisors and mentors can help you transition to the next level of management skills while providing valuable insights into solving the problems that will confront your business through the “growing pain” years.

Having business advisors also shows that you recognize the value of having business advisors and are willing to listen to and follow advice to help grow your business. Lenders will view you and your business more favorably.

STOP!

If you cannot answer “yes” to all the questions above, then you may have difficulties in obtaining financing for your business. You will need to re- evaluate your business plans in relation to your personal financial abilities. Prospective lenders, whether they be commercial, private or from the government sector, will require your personal investment into the business as a way of confirming your commitment to the success of the business. Without your personal stake in the business, lenders will be reluctant to approve loan requests.

For Business Assistance, contact Rebecca Engum at the Great Falls Development Authority Small Business Development Center at [email protected]

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