What to Do If You Need Growth Capital
Congratulations on your success, all your hard work is paying off. You are doing well and want to expand. But, while your company is stable and profitable its cash flow will not support a large growth expenditure. You need to get a loan from the bank.
In this era of Shark Tank and all its offshoots, the traditional bank is still the lender of choice for most small business owners. But, due to increased regulations, they are finding it difficult to secure loans. Veterans of the old process and rookies new to the game are both frustrated and confused by the current procedures.
There are 4 steps to applying for and getting an expansion loan – many small business owners are not good at any of them. However, you are going to have to get good at them, because the bank has the money and you have to follow their rules to get it.
1. Be realistic
It is a given in the banking industry that owners are unrealistic when valuing their companies. They see the application process as a way to fulfill their desires, hopes, and dreams (emotions), rather than a business transaction (logic). Most do not realize they are acting on emotion rather than logic. They believe they are being rational, but they are not.
Banks want realistic data and hard numbers based on revenue, profit, physical assets, receivables, current customers’ contracts and future customers’ letters of intent. They want the actual, not perceived, value of the business and its ability to pay the money back.
2. Do the homework
Learn to speak the language of banks – numbers. Do you understand your financials? Can you talk about margins, profit, debt-to-income ratio and overhead with authority? Do you know what servicing the debt means? What is your credit score? Is your customer base large enough?
Expecting the bank to give you money when you are not able to tell them exactly how you plan to pay it back is unrealistic and naïve. Talk to a loan specialist and get an idea of what a successful loan application requires. Do your homework before submitting the paperwork.
3. Have patience
Now you know – based on your realistic attitude and the homework you have done – what is required to successfully get a loan. If you have everything you need and are sure that you are ready to apply, then you can skip this step and go directly to number 4.
However, if you are like most owners you have found that you are not ready to apply right away. Your financial house has to be put into order first. You might need to pay down debt, increase your credit score, clean up an existing credit line, find more customers or decrease production costs. Patience, time and sticking to a corrective plan are the 3rd step for many businesses.
4. Follow their procedures
This step should be a no-brainer, and yet accountants, consultants, and bankers are baffled by how often owners are their own worst enemies. Up to a point it is understandable – the typical owner started his business so he could do things his way and not have to answer to other people. Unfortunately, this does not work with banks.
Do not let your ego (emotion) get the best of you and sabotage the loan process in the final step. You have done the other 3 steps and know what they want – give it to them. Completely fill out and submit the paperwork exactly as they want it. Arrive at the interview on time. Be polite, concise and professional.
Experienced business bankers have seen too many successful businesses fail because of poorly funded, thought out and executed expansions. Although it may not seem like it sometimes, responsible small business owners and bankers have the same goal – a growing, thriving, profitable company.