When it comes to starting a business, there is an incredible amount of folklore about whether or not it’s possible without bank financing.
Of course, you can go either route. If you end up not being able to bootstrap, here’s what you need to know before sitting down with the bank.
Go with the (cash) flow.
If you want to get a loan, you have to prove consistency of cash flow. Ask yourself: Is my business cash flow positive? Am I profitable every month? Have I been profitable for one or two years, minimum? Most banks are comfortable lending at a debt-service ratio of about 3:1. For example, $150 each month of positive cash flow will get you about $50 of financing. The most important thing is that your cash flow be consistent. If your sales or profits change or go down, you could land in the deep end pretty quickly. Sales projections and hype won’t help you here. You need hard facts from tax returns, income statements, and balance sheets to prove that your business is stable and profitable from month to month.
Face the monster: Get a credit report.
Pull your credit report before you apply for a loan. Many people think of credit reports as being mysterious and ominous, but they’re usually not as bad as you imagine. The two areas that are typically shown are loans from banks, and credit card bills that are 30 days past due. Make sure you know what is on yours. Equifax is a great place to start. The process is quick, thorough, and transparent.
Talk it out with an expert.
If you’re going to borrow money, find a business counselor that can provide good advice. Counselors will help you figure out what rates are available and how much you want to borrow. There are numerous resources in the United States for entrepreneurs to get personalized information on lending, face-to-face. In North Carolina alone there are more than 50 state-funded small business centers and close to 10 business development centers funded by the Federal government. Another great organization is SCORE, where business executives offer counseling for free.
Be willing to give something up.
Collateral is a common source of secondary repayment. It isn’t always necessary in borrowing money, but it can help as a personal guarantee. Banks aren’t in business to sell your possessions and make a profit. They don’t want to have to foreclose on your home to collect. But if your primary source of repayment is cash flow, providing collateral can be like icing on the cake.
The fact is, you may be close to being “safe,” but not close enough for a bank. If you’re not the right candidate for bank financing but are still well-qualified for a loan, try what I like to call quasi-banking institutions. The Self Help Credit Union is a good place to try, as are SBA guaranteed programs. Important tip: if you do go the route of obtaining an SBA guaranteed loan, make sure that your lender has dealt with the SBA before. Don’t be afraid to try multiple places. The more shots you attempt, the more you may land.
Finally, if you are rejected, try to understand why and don’t let that stop you. If you hang all of your hopes on something daunting like financing, you’ll never get out of the gate. It’s important to dream big, but start small. Go back to square one when all else fails.
As told to Judith Ohikuare.