As a small business lender in California, we meet small business owners looking for capital for all sorts of reasons, and in all kinds of amounts and forms. One thing that almost all small business owners that we meet have in common? The need to do a little financial and business strategy housekeeping before they’re ready for an investment or loan. Below, our loan officer Carly Perera offers some tips to small businesses before they put in an initial ask at their bank, credit union, or community lender.
1. Clean out the cobwebs
Remember that loan you got from your brother/2nd cousin/next door neighbor in the early days? Is it still on your balance sheet? Perhaps it’s time to pay it back or negotiate a payment plan. Has your inventory figure remained the same on your balance sheet for the past two years because it is too much work to adjust it? Now is the time. Lastly, consider hiring a CPA to make sure your financials are in order so you’re ready to present them to your potential investor or lender.
2. Make sure all partners are on board
Raising equity or pursuing a loan should be a decision made by all partners involved in the business. Do not wait until conversations have gotten too far along before making sure all of your partners are okay with the method of financing you pursue, and the resulting consequences. Ownership can be diluted or your lender may request each partner to sign a personal guarantee, which is a typical requirement by most lenders for owners with 20% or more in the business.
3. Have a game plan
The worst answer to your lender’s question “How much money do you need?” is “I don’t know.” Even worse is “How much can you give me?” It’s the equivalent of asking for a blank check. Your investor/lender will want specific amounts, details about its intended uses, and your timeline for deploying it.
4. Know your audience
Although it might seem that your future investor or lender is looking for the same financial indicators of success, the way you present the information is very different. Your pitch deck for a potential investor may make your potential lender run in the other direction if your growth projections resemble a hockey stick. Investors will want to know your company’s valuation, which can be based on a variety of factors — earning potential, market risk, historical financial performance, and future market opportunities. Lenders will focus on your company’s financial history, feasible projections, profitability, and the company’s ability to repay the debt.
5. Honesty is the best policy
I know it goes against everything you’ve learned about negotiating as a shrewd business person in this cutthroat world. However, never lie or fail to disclose important financial information about your business to your potential lender.