Lending isn’t quite as tight as it was after the recent economic downturn, but it’s still a delicate process. Many small- and medium-sized businesses find it difficult to obtain bank financing because they don't know how to navigate the process. But, if you’re persistent enough, however, raising the necessary capital is still possible. At Blank Label, we were offered over $500,000 in debt financing.
To help you secure the financing you need, we’re going to share the four important lessons we learned about getting bank financing.
1. You might not need financing.
The most important step in the process is figuring out if you even need financing. Moreover, make sure debt financing is right for you. If you don't have the cash-flow to support interest payments, but anticipate high future growth, equity financing might make more sense for you. At Blank Label, before we raised our debt, we first raised a $1 million equity round. Some reasonable things to take out a bank loan for include costs for new equipment, real estate, or expansion. Some things that you don’t necessarily want to take a loan out for would include canceling out losses, building out a leased office, or acquiring assets that aren’t essential to your business. For us, we were able to tell the bank a very clear use of proceeds, specifically that we wanted to use the money to open new stores and that the debt was just to cover the first six months before the stores would become profitable.
2. Know what the banks look for.
Your best chance at landing bank financing is by thinking like a bank. Since most banks' revenue model is fairly comparable, that is, the interest rates are somewhat similar, it comes down to you proving to them that you won't default. This means that they have to take a wide variety of risk factors into consideration. Here are some of the most important things that banks look for that you need to be aware of:
- Industry. How risky is your industry as a whole? If you’re in a risky industry, do you have a plan to overcome the obstacles that your competition cannot?
- Risk analysis. Are your financials sound? How many years have you been in business? Do you have any outstanding debts or liabilities?
- Business plan and model. Will you be able to overcome changes in the economy? Do you have a model that can sustain growth?
- Your personal equity. Are you risking any of your own capital for the business? If the business fails, will you be able to make good on the loan?
3. Prepare your pitch carefully.
Falling short in one of the above areas isn’t atypical for businesses pitching banks. In fact, it’s quite common. After all, if you’re in a great industry, have a perfect plan, and have plenty of business and personal capital, you may not need a loan in the first place.
Even the Small Business Administration, the federal agency that underwrites many of these loans, states your loan application is how you can overcome any shortcomings. It includes a complete business plan, your company’s financial information, and at least three years of your business and personal tax returns. Spend as much time as possible on your business plan. Go over it carefully, making sure that your strategy and analysis makes sense. If your application has any shortcomings, take the time to address them thoroughly.
4. Consider your alternatives.
Landing financing is exciting, but it’s not time to celebrate. Instead, send the application to other banks. There’s a good chance you’ll be able to negotiate even more favorable terms with another lender.
Even if you get declined by all the banks you apply to, it isn’t the end of the road. There are online lenders and private investors. You just have to be careful as they will likely ask for higher interest rates due to the higher risk, and again you just want to make sure that you will have the cash flows to support it.
Securing financing can be difficult, but following this advice gives you your best chance possible. Taking the time to prepare sets yourself apart from the competition and makes you seem like the kind of business banks want to lend their money to.