As a business owner, eventually you will need money. Once you have a track record in business with positive activity on your balance sheet, you can consider approaching a bank for a business line of credit. Business cash flow tends to be uneven; seldom do revenues and expenses arrive in a timely fashion and sometimes a short-term line of credit is just what you need. The problem could be a pre-season inventory purchase, an unexpected machine breakdown, or a delay in getting a payment from a big client. Cultivating a positive relationship with a bank prior to having a need for a line of credit is key. It could mean the difference between success and failure. Here are some points to consider:
- Look local. Look first for a local bank that can address your needs. Preferably, deal with a bank with which you already have a personal relationship history. They will have a pretty good idea of who you are and it will give you an edge in creating a new business relationship. Visit from time to time so people know your face. Use these visits to keep senior-level bank personnel up to date on your business activities. If you don’t have a personal bank, look for institutions that focus on loaning to neighborhood or women-owned businesses, etc.
- Do your homework. Know your credit history before you go for a loan or line of credit. In a tight credit market, it is essential to keep your credit score as high as possible. Banks will only make loans to clients with pristine credit. Even the SBA will not support your business if your personal credit score is below 650.
- Be prepared. Banks will ask a ton of questions about your business plan, loan requirements, collateral and strategy for repayment. When applying for a bank loan, remember that 90 percent of the bank’s decision to loan is based on two numbers: your cash flow and current net worth. The remaining 10 percent of the decision is based on such items as credit history and continued business viability.
- The importance of cash flow, defined as the difference between cash receipts and cash payments, it is a key indicator to your bank on how your business is doing. Your goal is to hold on to your cash as long as you can without getting a reputation as a business that does not pay its bills. You must make sure your business always has enough cash to function.
- A word of caution. Make the decision to give a personal guarantee for your business loan only after you fully understand all the ramifications. You are now personally liable for the total value of the loan if the business cannot pay, regardless if the business is incorporated, a partnership, or a sole proprietorship. Banks may place liens against your personal residence as part of these guarantees and this can be done without your knowledge. Personal guarantees are a fact of life for the small business owner, so be prepared for them. But be certain you understand the worst-case scenario.
- Get Help. Find your local Small Business Development Center (SBDC) or other small business non-profit that has a micro-lending program. Such groups often have loan packaging deals under $50,000 and more importantly, many have special relationships with financial institutions that will work hard to approve clients these groups send them.
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Melinda F. Emerson, known to many as SmallBizLady is one of America’s leading small business experts.
As a seasoned