Becoming bankable is a major milestone for every business, let alone young businesses, and unfortunately there’s not a one size fits all solution for how to get there. To be bankable means that a business is able to receive some form of traditional financing package from a bank. Whether that be a $10,000 operating line of credit or a $200,000 term loan for equipment, to grow and develop your business to the point where it no longer needs debt financing or is able to qualify for some level of bank financing is a huge achievement. And the best part… it’s not impossible to get there. Contrary to popular belief, banks are lending at an all-time high to small businesses, they have more small business focused products than ever, and they want to keep finding small businesses to help scale.
That’s all fine and good, right? But how does business get to the point where it’s bankable? Every aspect of a business contributes to its overall genetic makeup that ultimately creates a unique response from lenders that look at each business independently from others. Now, there are certain standards that tend to be very telling of whether a traditional business loan will be possible such as personal credit score, time in business, profitability, debt service coverage, and collateral but not all of those need to be perfect in order to achieve financing. And there are many things businesses can be doing today to advance their business closer to becoming bankable.
Develop a good banking relationship.
Obviously, just being good friends with your local bank or banker isn’t going to earn you all the funding you need. But that’s not the point. The point is that using the banking institution of your preference for things like deposits, merchant services, or credit cards will help that bank become familiar with your credibility, business trends, and business needs. Then, when your business is ready for a traditional lending product, your bank doesn’t have to start at square one getting to know you and figuring out what you need.
Time and time again, businesses can’t get what they need because they can’t show resource providers exactly what it is that they need and why they need it. One of the biggest favors a business can do for itself is to have accurate and up-to-date financial reporting. Not only for access to capital, but for a whole host of other reasons. It’s common knowledge that it’s not the most affordable resource in the world to pay for a CPA to do your bookkeeping, and that’s not always necessary. Depending on the size and complexity of your business, your confidence in self-bookkeeping practices, and time availability your level of professional assistance needed may vary. If you feel confident in your bookkeeping you should still consult a CPA quarterly to double check your numbers and to get some advice on how to questions like categorizing expenses effectively to lower tax brackets, ensure payroll tax is being calculated correctly, and other reasons. If you haven’t the faintest idea of where to start when it comes to financial recording or flat out don’t have the time, the higher cost should be justified to make sure you are avoiding potential catastrophic pitfalls. Lastly, when it comes time to seek financing, it’s going to be an expectation that your bookkeeping is accessible and understandable in order for your banking partner to see the need and justification for that financing. Going through the effort and expense of maintaining solid accounting will make nearly every part of your business more manageable.
The stronger you are personally, the stronger your business is.
In a perfect world, financing requests for small businesses would be based entirely on the business, but that unfortunate truth is that most small businesses aren’t to a point where that is enough. Most lenders will look into the owner(s) personal strength as well (such as financial health and credit worthiness). If a lender finds that the owner doesn’t manage personal finances well or keep up with personal obligations – it makes the decision easy as the same would be expected in your business. Of course, life happens and certain circumstances are impossible to avoid, but it would serve you well to be cautious and proactive at making sure your personal matters are in order. Although it can be difficult and unwanted, two other personal credit attributes that a lender will weigh heavily in your favor is to 1) maintain income from outside of the business and 2) have strong cosigners willing to help. Maybe that income comes from keeping a full-time job and hiring someone instead or working on the business in your off hours until the business can truly sustain you and the business. As for cosigners, it can be incredibly difficult to ask a friend or family member to cosign on your loan request, but if they bring strong income and credit, then that will help greatly. Unfortunately, there are no overnight solutions to becoming bankable and it often takes time. It can be a frustrating process for business owners and will always be an obstacle when it comes to securing capital. Although it takes time and work to become bankable, you now know the tasks that you can be doing today to get there sooner.