by Chris Frye
Tax Manager

Finding a solid source for outside financing has been the Holy Grail for small businesses in recent years.  With banks tightening their lending and qualification standards, available funds have become scarce.  Nevertheless, most banks in the community recognize the value small business provides to the local economy and are eager to lend to an organization that can paint a favorable picture of itself.  Consider five key areas that can help your business look good for potential financing opportunities in the New Year.

Cash Flow

Cash flow doesn’t just keep business owners up at night.  Ask any banker what their top issues for loan prequalification are and I’ll bet cash flow ranks close to the top.  At the end of the day, it all boils down to whether or not a lender feels confident that your organization can perform on its obligation.  The generation of positive cash flow is the number one way to prove sustainability and alleviate perceived risk to the creditor.  Remember that you have to crawl before you can walk.  Projections for future cash flow are good, but demonstrating a track record of success provides concrete results.  Operations may need to be adjusted in the short-term to achieve positive cash flow prior to the receipt of anticipated financing.

Payment History

In sports, many coaches will say that you are only as good as your last game.  Similarly, in financing, you are only as good as your last loan.  Even if funds are tight, the ability to demonstrate that you have honored your previous loan commitments will go a long way in the eyes of the lender.  If you have a solid payment history, make sure to highlight this, especially if pursuing funds from an institution you have not worked with in the past.  If your history is somewhat blighted, there still may be hope.  Start with a smaller loan (vehicle, equipment, etc.) before going after the million dollar line of credit.  While history alone will rarely win you a loan, it’s a great way to get your foot in the door.

Collateral and Capital

Call this the proverbial “skin in the game.”  This is especially important for organizations who may be struggling with cash flow and have a less than perfect past payment history.  Lending institutions are not in business to lose money, and need assurance that their investment is protected in the unfortunate case of default.  Some small businesses may be rich with “hard assets” (land, buildings, equipment, inventory), but cash poor.  In some cases, the pledging of these assets as collateral may make sense if the sought after financing is critical to obtaining your goals.  Obviously the implications to the business in the worst case scenario of default need to be weighed against the potential gain financing may provide.  In addition, a lender may require you to build up your capital reserves in advance of becoming a good candidate in their risk assessment model.

Develop a Business Plan

Think of this as “doing your homework.”  Substantial time will need to be invested into strategically planning your organization’s future and documenting how the results will play-out financially for an extended period of time.  Having a basis for your assumptions is critical.  Vetting your ideas and conclusions with a trusted advisor will ensure that every detail is accounted for and no stone is left unturned.  Even if your past is less than glamorous, a roadmap to future success will show lenders that your business is committed to making the necessary changes it will take to turn things around.

Reputation of Owners and Management

Your reputation is invaluable, however it is often overlooked.  Reputation is one thing you have complete control of, even more so than the financial numbers.  Integrity and competence of owners and the key members of management is paramount.  Avoid situations that could compromise this key asset you have worked so hard to earn.  It’s been said that “it takes twenty years to build a reputation, and five minutes to lose it.”  Demonstrating to a lender that you have the proper team in place will ease many of their concerns regarding the future direction of the organization.  If possible, assemble a team with diverse experiences and a proven history of success.

While the road ahead for small businesses may be tough and treacherous, I still believe that there is the potential for organizations that desire financing to have the ability to tap into this resource.  It may take some time to get your financial situation in order, but remember that “Rome wasn’t built in a day.”  Understanding how lenders view your organization as a potential credit candidate will ensure that your business takes the appropriate steps to position itself for a favorable outcome.