When trying to secure a small business loan, there are several things to consider. Our blog post “How to Take the Pain Out of Getting a Loan” discussed in detail some of the steps to doing this, but an article we read recently made us consider some different ways to think about getting small business loans.
A Hawaii Business Journal talks about some of these points, saying:
“Know your credit score:…Your credit score is a crucial part of how a lender will assess your risk as a borrower. Having the best credit possible is important because it provides insight into your character, and propensity to repay financial obligations.”Ms. Lee – Hawaii Business Journal
Amen! Between our article and Ms. Lee’s, we would like to go over our tips and give you some additional thoughts.
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“Seek advice from a mentor”
If this is your first time trying to secure a loan, you probably aren’t aware of the most common pitfall you face. As a result, It’s easy to make some rookie mistakes. It can be difficult to find a trusted mentor. However, there are a few tips you can use to help in selecting the right one
Search your network:
Small business owners tend to be willing to help each other. As a result, you probably already know someone who has done this before and would be willing to help
Check their credentials:
Unfortunately, there are unscrupulous businesses and people who look to prey on small businesses, especially as the market for small business lending grows. It pays to make sure your ‘mentor’ has done this before and is knowledgeable. Ask for examples
Explore free services:
SCORE is an excellent resource for free advice and mentorship. SCORE is funded by the Small Business Administration (SBA). There is usually at least one office in every major city. While SCORE provides a great service, it is definitely a do-it-yourself shop. If you need more hand-holding, there are reputable consultants, who would be more than willing to help.
“Be realistic and honest”
It is very important to build credibility when trying to secure a small business loan. Your potential lender will want to be certain that the data you are providing is accurate and reasonable.
There are inherent biases in securing a loan
The one point that Ms. Lee doesn’t raise is the bias in lending practices. There are a racial and gender biases in lending. We’ve seen it. It’s well documented. Our clients have experienced it.
While it’s a fact, it can be managed. The SBA has programs in place to help address these biases when securing a loan. While helpful, they don’t eliminate entirely. It is important to go in with your eyes open. It also helps to have some guidance. Thus, it is a good idea to have a mentor if you are concerned this issue might apply to your business.
“Build a cash reserve & Cash flow empowers”
The first point deals with liquidity. Liquidity is a term, which means how much cash, or assets you can quickly convert in cash, do you have. A business with more liquidity is less risky than one that does not. Not every business has the luxury of high liquidity. Thus, it is important not to wait until you are in a liquidity crunch to secure a small business loan.
She makes a similar point on cash flow. You need to make a profit to pay off the loan. Lenders will look for evidence that you will have enough cash to pay off your debt. A business with stronger cash flow is less risky. Therefore, you are likely to get better rates. Again, timing is everything. Don’t wait until you are at risk of losses to try to secure a small business loan. If you do, it may be too late.
Securing a small business loan can be very challenging. However, it is possible if you are prepared.
At ProStrategix, we know you have concerns. We’re designed to help give you the business support you need so you can focus on doing what you love. If you would like to learn about how we might be able to help you, please contact us.