The three best ways to increase your chances of getting financing for your startup are to:
- Know what lenders look for when determining if and how much financing they will provide
- Be prepared and professional when requesting financing to give lenders confidence in you and your business
- Look for alternative financing sources beyond the bank including factoring companies, asset based lenders, leasing, government incentives, private equity and angel investors
What lenders look for
The number one priority of all lenders is to protect their capital. They need to be confident that you will repay the loan as scheduled. Lenders often use the 5 C’s of Credit in determining your credit risk and deciding if they will approve your financing request.
- Capacity: Do you and/or your business have the financial capacity to repay the loan? Do you have the cash flow and profit to comfortably afford the new payments? Show that you’ve done your homework. Brand new startups need to provide a solid business plan, with detailed cash flow projections. Existing startups need to provide detailed, accurate, up-to-date financial statements and show how the new financing will increase revenue and add to bottom line.
- Character: Regardless of how confident the lender is in your ability to repay the loan, they need to know you are of good character. Sometimes unexpected things happen. For example, sales don’t materialize, there is a major market disruption, new competitors enter the market. Regardless of the reason, lenders need to know that if the going gets tough, you have the character to live up to your commitments. The best way to predict future behavior is past behavior, so lenders will look at both your company’s credit history and your personal credit history. Do you or your business have a history of defaulting on obligations? Are you involved in any disputes, litigations or collections? Get both your business and personal credit reports before applying for financing. Resolve any outstanding issues or defaults, update information and fix any errors before you apply. It may take up to two months before improvements are reflected on your credit reports, so do this well in advance of applying for financing. If you or your business has a troubled credit history, that can’t be easily repaired, so be prepared to explain why and what you are doing to repair it. Always be upfront about past issues. If a lender finds out after the fact, it will not give them confidence in your character.
- Collateral: Collateral is a secondary source of repayment. It gives the lender confidence that if the loan cannot be repaid by operating profits, there are secondary assets that can be used or sold to repay the loan. Collateral may be in the business. If there is not sufficient collateral in the business, personal collateral may needed, such as a personal guarantee or a collateral mortgage on personal property.
- Capital: Capital is what you are contributing and includes personal investment into the business, retained earnings and other assets owned by you or the business. Lenders need to know that you have “skin in the game” and also view it as an additional means to repay the loan if necessary.
- Conditions: Conditions are more subjective factors in evaluating creditworthiness. Lenders need to know the purpose of the financing. What will the money be used for and how will it improve the business? They may also evaluate external conditions such as the economy, the industry, local market conditions, the borrowers experience and expertise, etc. Be prepared to explain exactly what the funds will be used for and how they will impact and improve your startup’s bottom line.
Be prepared and professional
In addition to evaluating a financing request in terms of the 5 C’s of Credit, lenders also use subjective factors in evaluating a request. They want to work with business owners who give them confidence that their capital is well protected. You must be well prepared and professional when making your financing request.
Below are six things you can do to ensure you are well prepared and professional when requesting financing.
- Start the process early. Apply for financing well before you need it. It can sometimes take weeks or months to secure financing. It will be less stressful for you and will give the lender confidence that you are on top of your business if you are not scrambling at the last minute.
- Calculate how much you need in advance of the request and be able to clearly identify exactly what the funds will be used for, the impact on the bottom line and how and when it will be repaid. Lenders don’t want to hear, “I’ll take whatever you can give me.”
- Provide a detailed, professional business plan that includes an executive summary laying out exactly what your company does, how it makes money and who your customers are. In the main section, provide additional details on you, your team, your experience, your market, competitors, business model and costs. Attach three years’ worth of financial statements and cash flow projections. If this is too daunting of a task, pay for professional help.
- Have all your supporting documents ready, including articles of incorporation, tax returns, lease agreements, etc.
- Provide additional information promptly. You may be asked to provide additional details or documents. Responding promptly shows that you are organized and on top of your business.
- Avoid surprises. If you have a problem, or if there is an issue, be upfront about it. Don’t hide facts. When a lender inevitably finds out, trust will be damaged.
Look for alternative financing sources
It is always good practice to establish more than one financing relationship. This way, you spread your risk and have greater access to capital. Look beyond traditional banking for financing. Less than 25 percent of small businesses get approved for traditional bank business loans. There are many alternative sources of financing, including factoring companies, asset based lenders, leasing companies, government agencies and private investors. Do your homework, shop around and compare options.