As a small business lender in California, we meet small businesses searching for capital for every type of reasons, as well as in all sorts of amounts and forms. One thing that almost all small business owners that people meet have in common? The necessity to do some financial and business strategy housekeeping before they're ready to have an investment or loan. Below, our loan officer Carly Perera offers some suggestions to small businesses before they put within an initial ask at their bank, bank, or community lender.
1. Cleanse the cobwebs
Remember credit you have from your brother/2nd cousin/next door neighbor in the past? Could it be still on your balance sheet? Perhaps you're ready to repay it or negotiate a payment plan. Has your inventory figure remained exactly the same in your balance sheet for the past 2 yrs because it is an excessive amount of try to adjust it? This is the time. Lastly, consider getting 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 take presctiption board
Raising equity or pursuing financing should be a choice produced by all partners active in the business. Don't hold back until conversations have gotten too far along prior to making sure all 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 an individual guarantee, which is a typical requirement by many lenders for owners with 20% or more in the industry.
3. Have a game plan
The worst response to your lender's question “How much money do you need?” is “I have no idea.” A whole lot worse is “How much can you give me?” It's the equivalent of requesting an empty check. Your investor/lender will need specific amounts, information regarding its intended uses, as well as your timeline for deploying it.
4. Know your audience
Although it might seem that the future investor or lender wants the same financial indicators of success, how you present the information is completely different. Your pitch deck for any potential investor could make your potential lender run within the other way if your growth projections look like a hockey stick. Investors will want to know your company's valuation, which may be based on a number of factors – earning potential, market risk, historical financial performance, and future market opportunities. Lenders will concentrate on your company's financial history, feasible projections, profitability, and the company's ability to repay your debt.
5. Honesty is the best policy
I know it goes against everything you've discovered negotiating as a shrewd business person in this cutthroat world. However, never lie or neglect to disclose important financial information about your business for your potential lender.
