Commercial lenders are conservative by nature. They want to know their money is secure. They need to be confident that the borrower will be able to repay the loan or that assets that can be liquidated in case of default. Securing financing for a startup is especially challenging, as it is inherently more risky than financing an existing business.
Without a solid track record, and time to build up equity, the lender bases their financing decision primarily on the business plan and on the owner’s ability to execute the plan. In order to be successful in securing financing for your startup, it is essential that you be well prepared and do all you can to give the lender confidence that you and your business will be successful.
Seven tips to help secure financing for your small business
- Provide a detailed, realistic business plan
- Show the potential lender you have done your research, know your market and have the expertise and systems in place to execute your plan.
- Include a 12-month cash flow projection. Provide best, likely and worst case scenarios.
- Include your resume to show you have the experience to execute the plan.
- Know what you need. Be able to succinctly, and in detail, explain:
- How much you need
- What the funds will be used for
- How long will you need the funds
- How do you intent to pay it back
- Have strong personal credit
- Run your personal credit score before applying for a business loan. If it is low, spend a couple of months working to improve it. Focus on paying bills on time and in full. If you can show lenders you are being proactive in repairing a poor credit score, it will improve your chances of being approved.
- If there are red flags on your credit history, be prepared to explain why and what steps you are taking to repair them.
- If you have limited personal credit history, get a credit card and pay it off in full and on time, to build your credit history.
- If your business is already operating, request a line of credit, or payment terms, from some of your suppliers so you can build your business credit score.
- If your business is already operating, provide details on your current situation
- Provide a report card with key performance indicators from your business plan. Show that you are successfully executing your plan and/or making changes to improve your results.
- Present accurate, up-to-date financials including a balance sheet, income statement, accounts receivable and accounts payable reports. It is worth it to have a bookkeeper or accountant prepare your statements for the presentation.
- Understand your financials and be able to discuss the results with the potential lender.
- Make sure you are up to date on all your government remittances.
- Follow up promptly and thoroughly
- After an initial meeting or online application, the lender may request additional information. Provide the information quickly and in detail. Show them you are organized and meet your commitments.
- Don’t hide negative results. Be forthcoming and explain the situation and steps you are taking to rectify it. Not being truthful and forthcoming will surely mean your request will be rejected.
- Consider alternative sources of funding. Banks are usually the first stop, but there are other sources of funding for your business. These include:
- Credit unions
- Factoring companies
- Equity investors
- Family and friends
- Don’t give up
- Find out why your application was rejected. Get as many specifics as possible.
- Use this information to adjust your plan, presentation and ask.
- Ask for recommendations to other potential lenders. It may be that your business simply does not fit with their funding model, but they may know other lenders that like your type of business or are more open to startups.
Don’t be discouraged if your funding request is rejected. Use it as a learning experience. Find out why your request was rejected and work on improving any areas of concern. Look beyond traditional bank financing and be open to alternative lenders.