3 Things You Must Do Before Applying for A Loan
It’s amazing how unprepared business owners are when they approach lenders for credit lines, loans or equity investments. In my 20 years in business, I’ve seen so many missteps that you’d almost think these people are sabotaging themselves deliberately!
In this series of articles, I’ll unpack how bankers and investors think to make your credit or loan application get first-class treatment. As a former banker, these easy to follow nuggets of wisdom can mean the difference between you building a multi-million dollar business or running out of cash and options.
First, get your books in top shape. Make sure your Net Income Statement, Statement of Cash Flows and Balance Sheet are complete, current and accurate. If you can’t print out each of these statements with three clicks of a mouse, you have some work to do before you apply for a loan. Don’t wait for the loan officer to tell you there are problems with your application because your books are a mess. If you think I’m exaggerating, think again. The Intuit Company just took a poll; 87% of small business owners do their own books and 40% of them admit to being “financially illiterate”. The term is in quotes because that is the exact wording the survey used. Imagine, if almost half admitted to this, the real number must be twice that!
Hire an experienced, trustworthy bookkeeper. It’s the best investment you can make. You can find them listed on either FindAProAdvisor.com or ProfitFirstProfesssionals.com. Punch in your zip code and like magic, a list of advisors in your area appear with ratings and comments just like Angie’s List. Now you have no excuse.
Second, you learn how to read your financial statements to answer the three most important questions every business owner must answer:
- Are You Making Money?
- Do You Have Enough Money to Pay the Bills?
- Are You Building Wealth or Destroying It?
If you don’t know the answers to these questions or where to find them, lenders lose confidence. Put yourself in their shoes. If you had the choice to finance a business run by someone who was on their game and knew the “why” behind the business performance or someone who was clueless, who do you think would be the better credit risk? I wrote the book, Accounting for the Numberphobic to solve this problem so you never have to worry about it again. It’s all the stuff you never learned in architecture, design, and IT school. Disney veteran Ron Buccalo illustrated it in order to take a dry, awful topic and make it funny.
Third, if you’re playing the “minimize taxes” game it might come back to haunt you when applying for a business loan or line of credit. Why? Because what helps in minimizing taxes and conserving cash works against you when you’re applying for a loan.
Front loading expenses to minimize earnings and therefore taxes might be a great (and perfectly legal) strategy in the early years of a business to conserve cash. The problem is, your lender is going to see a razor thin bottom line on your Net Income Statement which has the potential to work against you when applying for a loan. For sure, other factors are involved in the final decision, such as the amount of existing credit, profit and cash trending, client loyalty, cash management practices, etc. Just know your banker has three questions he/ she needs to answer when reviewing your loan application:
- Is this business viable long term?
- Can this business pay back the loan on the terms we agree to?
- Is this business a better credit risk than its peers?
So if you think you might want to apply for a credit line or loan from a bank, supplier or third party, just remember to prepare the books, shore up your own knowledge of what the numbers mean, and position the profits and cash flow of the business to give you the best chance of a “yes” response from your lender. Your success rate in receiving the loans you apply for go up dramatically if you follow these three simple tips before applying for a loan.