Getting Financials Ready for the Bank

The SBA operates two primary loan programs, known by the sections of the regulations that created them: 7(a), which provides general funding for establishing a new business or expanding an existing business; and 504, used to purchase major equipment or real estate. For the fiscal year ending April 25, 2015, the Small Business Administration funded 35,363 small business loans worth a total of $13.7 billion.

The money is out there, but not everyone receives it. Pepperdine University and Dun & Bradstreet conducted a quarterly survey on access to capital by small businesses. During the three-year period ending in 2015, the quarterly success rate for bank loan applications has ranged from a high of 54 percent (2Q2014 and 3Q2014) to a low of 33 percent (2Q2013).

The Small Business Administration has prepared a video, How to Prepare a Loan Package, which covers the basics: a memo that explains why you need the loan and how you will pay it off; recent financial statements for the business; and information on your personal net worth. (Why? Because most SBA loans, especially to new companies, call for a personal guarantee from the founders).

Related: Financial Projections and Your Business Plan

Lenders make money when they make good loans. They lose money when they make mistakes. If the entrepreneur makes a mistake in a loan application, the bank officer will see that as a bullet to be dodged.

That’s why half, or more, of small business loan applications end up being rejected.

The most common mistake made by entrepreneurs in their loan application is having financials that are out of order, Idaima Robles, Director of the Access to Capital Program at the Women’s Business Development Center in Chicago, said. It starts at the stage of bookkeeping.

“They do have an accountant, but they just use that accountant once a year,” she said. “They do use QuickBooks, but they don’t use it correctly.”

The projections need to be connected to the actual results, and the chart of accounts needs to reflect the reality of the day-to-day business.

“Everything goes hand-in-hand,” she said.

Chicago’s WBDC is one of a thousand or so Small Business Development Centers located around the country. These are nonprofit organizations that work with entrepreneurs to provide business education, including QuickBooks training, and access to funding. The WBDC offers classes in strategic and financial planning to help women-owned small business succeed. Robles says that basic planning is important to raising capital.

”It may take a little time away from making revenue, but it’s good to step back,” she said.

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Along with getting the business financials in order, entrepreneurs looking for financing need to think about their personal finances.

“There’s a big misconception out there that personal credit has nothing to do with the business,” Robles said, “but lenders do want to know if the business owner has a record of handling credit and will pay back the loan, regardless of what the business does.”

Robles also said that prospective borrowers should do research on lenders, as some are more interested in creating relationships, while others are more interested in transactions. Those interested in developing relationships will offer feedback on ways to improve an application, tossing the ball to the entrepreneur. That’s a good thing, even if it is painful.

“Be open to advice from the lender,” she said, to improve your odds of long-term success.

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