"Your business loan request has been rejected." These are words sole proprietors and small business owners dread. So what can be done?
First, understand why. Was your loan request simply too small-below the threshold amount that is economical for the lender? If so, you may need to find a lender with a lower threshold.
Fortunately, there are nonprofit lenders who have raised capital from lenders and donors to make small loans feasible.
But if the reason you were turned down goes beyond the loan size, you may need to change your approach or your business. Here is a loan preparation process to help you go from being loan-eager to loan-ready.
Get An Accountant
Every business, large and small, needs an accountant. Accountants often pay for themselves simply by identifying tax savings. Good accountants also take questions year round and help you avoid surprises in April. For a list of accountants who serve micro-businesses, go to the NH Community Loan Fund's small-business lending resource Web page.
Get Records in Order
Develop accurate and organized financial records. Too often, owners are good at the service or product they make, but lack business management skills. You need administrative and financial systems to collect basic data about your business. Consider learning QuickBooks or hiring a bookkeeper.
Understand Your Financials
Take the time to truly understand what the balance sheet, income sheet and cash flow tell you (and lenders). Otherwise it is like trying to fly a plane without a dashboard.
For example, it is useful to compare your actual monthly results to that month's budget. This shows any discrepancies so you know whether to budget more conservatively. It also helps you foresee the impact of changes to cash flow and year-end projections.
Regular actuals-vs.-budget comparisons will help you develop a deeper understanding of your business, and a clarity and confidence lenders will find appealing.
How Much Do You Need?
Begin with the end in mind: What do you need the money to accomplish and when? Are you looking to even out seasonality in your business cycle or to introduce a new product? Be sure the repayment terms match your purpose and cash flow. For instance, if you are buying equipment with a five-year life span, you want to repay the loan in three years to have cash when you need to replace it.
Test Assumptions
Have you built in sufficient contingencies for the unforeseen? Typically, owners are optimists. That's great, but not when it comes to budgeting. Use your accountant and other advisors as a sounding board to challenge your assumptions. Better yet, conduct a financial sensitivity analysis to see how different scenarios affect your cash flow and how you would respond.
All plans encounter unforeseen changes. This is why lenders often require a Debt Service Coverage Ratio (a measure of the uncommitted cash the business has available to pay the loan) of better than 1.25 to 1.0. This ratio means the business could have a 20 percent drop in cash to cover debts and still pay the loan. If the business started with a 1.0 DSCR and experienced a 25 percent decrease, it could only pay 75 percent of the debt payments and would default on the loan.
Are You Ready for a Loan?
Ask yourself whether it is truly feasible to take out a loan. You may be ready to approach lenders, but if you had difficulty developing a scenario with realistic assumptions, you may have a problematic business model.
If so, taking out a loan would only exacerbate your current money-losing proposition. Instead, modify your business offerings until you find a product or service customers are willing to buy from you at a profitable price.
Approach a couple of banks to find a good fit. Ask upfront whether they make loans the size you want and how many they have made in the past year to determine how amenable they will be to your request. An early "no" is better than a long drawn out "no." If you are turned down, ask what needs to change for your business to become bankable. The answer(s) can help determine whether you need to revisit earlier loan preparation steps or approach alternative lenders.
Alternative Lenders
Seek alternative lending sources. There are nonprofit organizations whose focus is to get capital to underserved market segments. But they won't make a loan unless it is strategic. They will take the time to get to know you and your business to determine whether the risks other lenders saw can be mitigated through training and assistance. If so, you get the loan. If not, they will hopefully give you clarity on how to move your business forward.
John Hamilton is the vice president of economic opportunity for the NH Community Loan Fund. Contact him at jhamilton@community
loanfund.org. For more information, visit www.communityloanfund.org.