How to get a small business loan is a question that millions of business owners and would be business owners grapple with everyday.
It’s no secret that many small businesses are underfunded. Many small companies start by utilizing bootstrapping techniques instead of owner capital, and when the money starts to flow in, either out of need or greed, most business owners and professionals take out whatever they can, and never get around to making the capital investment that banks like to see.
Unfortunately, many small business owners and would be business owners operate under the assumption that they can get small business funding by just writing up a good business plan. (which is in itself quite an undertaking).
In my years of experience as both a small business owner and business coach, it’s always been my rule of thumb that banks want to lend money to companies who can prove they will be able to pay it back. That’s why so many business owners end up borrowing against their homes, or take out personal loans, until such point as they can establish credit for the business itself. Even then, unsecured small business loans of any magnatude are difficult to find.
There’s been a lot of talk about stimulus funds and bailout money, but how much of this will actually impact loans for small business?
That depends on who you are, what stage your business is in, what bank you’re dealing with and most importantly, how strong your financials are.
In a NY Times post entitled “The Secret Language of Bankers“, entrepreneur Jay Goltz says that “We are doing business in a new world. There are new rules.”
One of the rules Jay cites is the company’s debt to equity ratio, something that many small business owners aren’t aware of. Basically, it is the amount of money you have over and above the amount needed to cover your expenses. In speaking with some local bankers, Jay’s research showed that a 2 to 1 income to debt ratio is what they’re looking for, but, it also depends upon what form of equity you have (cash, real estate, inventory, etc.)
One banker Jay spoke to said “that a more important number was debt-to-Ebitda, which is earnings before interest, taxes, depreciation and amortization expenses”.
What they’re looking for, no matter what you call it is proof that you can pay the loan back, even if times get tough.
On a related note, the NY Times reports that President Obama is supposed to reveal a new plan this afternoon to “encourage lending to small business. According to an administration official, the proposal will increase caps for existing Small Business Administration loans and give smaller banks better access to funds from the Troubled Assets Relief Program.”
What that will really boil down to, only time will tell, but I’ll bet that if there’s really more money made available, it will go to those businesses who can PROVE they can pay it back, no matter what ratios they require.
Have you been successful borrowing money for your small business this year? I’d love to hear your stories good or bad.
Susan Martin, Small Business Financial Management
