If you are like many small business owners, you are optimistic about your company’s future growth prospects. Several surveys have reported the vast majority of businesses with less than $5 million in annual revenue are extremely confident in their business growth in 2016. That growth can create a need for additional employees, more inventory and new office space. This all leads to a need for capital.
For small business owners who are unprepared, obtaining financing can be a barrier to realizing that growth. It has been reported that only a third to a half of small businesses succeed in getting approved for a loan. Getting ready to apply for a loan needs to be done far in advance of applying. To help the process go smoothly, here are four areas you should look at prior to seeking a loan:
- Credit – For an entrepreneur, your personal credit score needs to be solid. It is a key indicator that you and your business are willing and able to pay back the loan. If you have a low score, start taking steps to improve it. This blog post has some suggestions for maintaining a good credit score.
- Cash Flow –This one is often overlooked. The definition of cash flow is pretty simple: cash in – cash out = cash flow. You might be thinking that your overall revenue is a measure of success, however, in commercial lending the most important metric is how much cash is available after expenses are paid. This will show if your business is able to service the debt.
Along the same lines, don’t try to hide your income at tax time. Many entrepreneurs encourage their tax preparers to include as many deductions as possible to reduce taxable income, but this can come back to haunt business owners seeking a bank loan. Talk to your accountant about the implications of how you file your taxes. An example is expensing instead of depreciating an eligible deduction. Depreciation is added back to calculate cash flow which will increase it.
- Collateral – Make sure you know and can identify all sources of collateral. While every effort is made to determine if you have the ability to repay the loan, lenders need to know they can recoup their funds if the worse should happen to your business. Collateral is required and the amount you can borrow is tied to it. If you are a new business considering an SBA loan, know that the SBA is required to take all available collateral.
- Debt Load – One of the top three reasons a loan is denied is the amount of debt a company has in relation to cash flow. This is known as the debt to income ratio or debt service coverage ratio. If your company has existing debt, you should calculate your company’s ratio including the new loan’s payment to make sure your cash flow will support all the debt.
Does your business have the capital necessary to seize growth opportunities? To learn more about acquiring the necessary financing contact the Univest Small Business Lending Team.
Univest Bank and Trust Co. is Member FDIC, Equal Opportunity and SBA Preferred Lender.