Last week we talked about the top four things small business owners worry about according to Goldman Sachs 10,000 Small Businesses program. The biggest concern is finding customers which we discussed in the first article.
This week we will discuss the second most pressing concern which is financing the business. Getting lending for a start-up can be very difficult and financing for an on-going business can be tricky as well. What does a bank need to be able to fund a start-up?
The traditional things a bank looks at when making lending decisions are cash flow, collateral and character. Cash flow to a banker means the business will have enough money to make the loan payments or pay back draws on a line of credit. Collateral means the business has some assets which the bank can sell if the loan cannot be repaid. Character means the business owner and staff have sufficient experience to make the business successful.
What many entrepreneurs don't realize is that bankers also look at the business owners themselves. Lenders want the reassurance that if the business doesn't succeed, they can go to the business owner to get repaid. Entrepreneurs looking to fund a start-up will be successful in obtaining financing if they have a good personal credit history and some personal funds to put into the business. People with poor credit history and no savings to put into the business will not be able to get a loan.
The key to ongoing financing for a business is to develop a relationship with your lender. Make sure you keep the bank aware of what is going on in the business, even if it is bad news. Lenders have extensive experience and may have ideas to help a business owner get through a difficult period. Another important piece is to be able to provide your lender with current, accurate financial statements.
Getting funding for a new business and continuing to be able to finance a small business are tricky tasks, but having a sound financial background and developing a good relationship with a banker can make the job easier.
Next week we will discuss business strategy and how small business owners can reduce their worry about developing it.