“Come back when you have more experience.” This response frustrated you during the interviews for your first job. But now you’re an entrepreneur. Today, if your banker says you’ve not been in business long enough to qualify for a loan, it’s even more frustrating.
Don’t be dismayed. There’s more you can do to become bankable than just wait for time to pass.
Disregard the Words
Entrepreneurs who have been told they haven’t been in business long enough often think they’ll have to wait a year or two before they can get a bank loan.
Your bank might say your business needs more seasoning, but what it really means is the financial statements you presented were insufficient.
Only cash repays a loan. You didn’t convince them you will have enough of it to meet your future debt obligations.
Don’t focus on the words used when your loan request is denied. Instead, learn what your bank must have to say “Yes.” It’s actually quite simple if you compare it to jumping out of an airplane.
You Need Two Parachutes
You may doubt you’d ever go skydiving under any circumstances, but you’d surely never do it using a single parachute. You’d want a backup chute just in case.
Your banker approaches lending money the same way. The primary source of loan repayment is always the cash your business generates from daily operations. This is your main parachute.
Your forecasts show your company’s plan to generate the cash needed to honor your debts.
If all goes as planned you’ll repay your loan without surprises. This is the soft landing your primary parachute should provide. Both you and your banker will be thrilled when your plans become reality.
You’ll both experience a different type of thrill if your results fall short.
Your Backup Parachute
The law of gravity demands all skydivers return to earth. Your banker will be just as demanding that you return the bank’s money.
If your operating earnings cannot repay your loan, resorting to secondary sources of repayment can still achieve this goal. It’s like pulling the ripcord on your second parachute.
The most common secondary sources of repayment are collateral and guarantees.
Regardless of how strong and steady your operations are, your banker wants a backup means to repay the loan.
Having strong secondary sources of repayment can get you the loan approval you need, even while your company is in its early growth stage.
All types of collateral can provide some comfort, but the greater liquidity, the greater the comfort. After cash and investments, accounts receivable are bankers’ favorite collateral.
Unfortunately, early stage companies typically don’t have many receivables, so they must rely on guarantees in order to obtain bank credit.
Personal guarantees usually are not the sole answer, however.
Most entrepreneurs heavily invest in their startups to the point that their personal balance sheets become anemic. In these cases experienced bankers seek supplemental guarantees from agencies which help new companies gain access to bank capital.
Consider Governmental Programs
The Small Business Administration is best known nationally, but every state has programs to foster the creation of new ventures.
In Ohio, the Department of Development coordinates numerous programs with the governor’s 12 economic development regions. Their Resource Ohio assistance guide (available at www.connectohio.com) lists dozens of programs, grants, and funds, plus both tax incentives and tax exemptions. None stipulate how old a company must be to qualify.
For instance, under the Ohio Mini-loan Guarantee Program, any business with fewer than 25 employees can apply for a 45 percent guarantee of up to $100,000 borrowed to purchase fixed assets. Some municipalities have their own loan guarantee programs.
Also, the Ohio Treasurer’s Linked Deposit Program can provide a 3 percent reduction in the bank’s interest rate. Lower payment amounts improve your approval chances.
ACTION STEP: Focus first on increasing the level and sustainability of your cash flow. Then consider ways to strengthen your secondary means of repayment. Your combined sources of repayment, not your years of experience, determine when you are a bankable credit. Your young venture might just be able to get a bank loan much sooner than you think.
