By Gerri Detweiler
Like many businesses today, the lending industry has been affected by rapid changes in the economy. Some lenders are offering smaller loans, some are imposing new requirements on borrowers, and others are waiting to see what happens before they jump back in. That’s why it’s more important than ever to understand what lenders are looking for and to position your business for the best possible shot when you need it.
The following are four steps you can take to help get your business lender ready:
1. Clean up your business bank account
Bank statements reveal the truth about your business, and for some lenders they are the deciding factor when it comes to offering small business financing. Lenders increasingly require a review of up-to-date bank statements to determine the fundability of your business. They may even ask you to link your bank account so they can analyze activity directly.
What are they looking for? Many factors can come into play here, but the most important are likely to be:
- Deposits. How many deposits are going into your bank account each month? If it’s just a few, your landscaping business may be too reliant on just a few clients. Lose one of them, and your business could be in trouble. Ideally, your bank account should show at least 10 deposits each month, though the exact number varies by lender and the nature of the business you are in.
- Low balances. Does your business bank account balance regularly fall to next to nothing? Or worse, does it go into the negative? Those could be signs of financial difficulties, and may even result in a rejection for financing.
- Withdrawals. If you have numerous daily or weekly withdrawals from other financing you’ve taken out make sure you disclose that to the lender.
All of this assumes your business has a business bank account and that you use it exclusively for business transactions. If you’ve been paying personal expenses from your business account, it’s time to clean up that habit. Pay yourself from your business account, then use personal funds to pay personal expenses.
And while you’re at it, consider using a small business credit card for business purchases. You’ll earn rewards and enjoy the highest level of fraud protection of any payment method.
2. Clean up your bookkeeping
Similarly, if you’re behind on your bookkeeping, now is the time to catch up. Failing to do so may put your business at a disadvantage when it comes to getting financing as the information gleaned from accounting may be used to help you qualify for financing. This was certainly true in the case of COVID-19 relief loans such as Paycheck Protection Program (PPP) loans and SBA Economic Injury Disaster Loans (EIDL) where the information from tax returns helped borrowers qualify.
Ideally, your books should be updated on a weekly or monthly basis at the latest. It will then be easy to pull financial statements such as the Statement of Cash Flows, Balance Sheets or Income Statement, which can provide you up-to-date insights into the financial health of your business.
You also want to make sure you can talk to a loan officer about what those financial reports mean — it might not be enough to simply pull the reports. If you’re unsure, this is a good time to reach out to your accountant — they can help you interpret what all those reports are saying about your business.
3. Spruce up your business plan
Many business owners are finding themselves pivoting in ways large and small. An updated business plan can help you identify new business opportunities, change pricing models or retire approaches that aren’t working.
Some small business lenders will require a business plan, but even if they don’t, the insights you gain can help you answer two key financing questions:
- How much you need to borrow?
- How will you use financing to grow your business?
If you need help creating or updating your business plan, your local SBA resource partner can help. These organizations provide free or low-cost help to small business owners and include:
- Small Business Development Centers
- Veteran Owned Business Centers
- Women’s Business Centers
Locate these local partners at SBA.gov/tools. The SBA also offers free business plan information on its website. Alternatively you can choose from popular business plan tools such as Canva, LivePlan or Wise Business plans.
4. Review business and personal credit
Sixty percent of small business owners who responded to the Federal Reserve’s 2020 Small Business Credit Survey reported they used either business credit or a combination of business and personal credit when they applied for financing.
Both are important. Yet the large majority of small business owners never check their business credit reports. Business credit may be used by lenders or alternative financing firms to screen applications or to search for UCC filings, tax liens or judgements or other information that can potentially impact an application for credit.
There’s another reason to check and monitor your business credit: fraud. KrebsonSecurity is noting an alarming increase in business identity theft from a “particularly aggressive business ID theft ring” that is targeting small businesses nationwide.
Regardless of whether your business is looking for financing now or may need to do so in the coming months, taking these four steps can make it easier to get the financing you need.
Gerri Detweiler has been guiding individuals through the confusing world of finance and credit for more than 20 years. She is the author or coauthor of five books, including her most recent, Finance Your Own Business: Get on the Financing Fast Track. Today, Detweiler serves as the education director for Nav, an online platform that matches small business owners to their best financing options and gives free access to personal and business credit scores.