Meeting Small Business Financing Needs, LaMar Van Dusen, Other Experts Weigh In

Financing the growth of a small business may be the biggest challenge that business owners face.

There are numerous types of loans available from numerous sources. You can get a cash advance against credit card income. Or an equipment purchase loan or lease. Commercial mortgages are another option. And you can apply to get financing through your local bank. Government loan programs are another option and online finance companies are happy to do business with you, too.

However, understanding the financing options and resources available to small business owners is only part of the puzzle. LaMar Van Dusen, whose company, Phoenix Management in Ontario, Toronto, consults with and does accounting for small businesses on a flat fee basis, said what’s more important is to first lay the groundwork so your company is best positioned to successfully secure financing when it’s needed.

Van Dusen explained further that there’s a certain amount of due diligence that small businesses should undertake to help them understand where to go for capital, what their commitment will be and whether their financial condition even qualifies them for a loan.

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These are six steps will help smooth your path:

1. If you haven’t built your business credit, start now to establish a solid base. A study last year by a group of U.S. Federal Reserve banks made a case in point: Nearly 90 percent of the small businesses they surveyed said they relied on the owner’s personal credit score to access money. That not only puts your personal assets at risk, but limits your access to some lower cost financing options. Some government programs, for example, require a business credit history.
2. Work on your cash flow. You don’t have to demonstrate your cash flow for all types of financing, but it’s still important to establish. As LaMar Van Dusen noted, it’s an indication of overall business health. And the bigger the loan, the more important cash flow is to showing the loan can be repaid, with interest.
3. Undertake a thorough evaluation of your financing needs, so you can intelligently decide what kind of lender and type of loan will meet them. What to weigh? How much you need and what, specifically, you need it for. How urgent your need and the how long is needed to pay the loan back. Also important: Whether collateral will be necessary and, if so, how much.
4. Assemble a comprehensive package of documentation that speaks to the solidity of your business. Beyond credit scores and cash flow, a business plan is more than just a road map for you – it shows lenders you know what you’re doing and where you’re going. Also important? Other outstanding debts on your balance sheet. It can take time for financing to go through. Putting all the pertinent details in your lender’s hands can speed things up.
5. Get educated on what you’re getting into. Ami Kassar, Chief Executive of MultiFunding.com, writes that being an informed shopper is key to securing financing. “That means learning the annual percentage rate (APR) of the loan. Know what the fees will be, as well as prepayment penalties.”
6. Get educated on your lender options. Conventional bank loans may carry lower interests rates, but big banks only approve 20 percent of loan requests; smaller banks, a little less than half. Alternative – online – lenders are another option. They offer much faster approvals and less stringent loan requirements. The offset to their risk, though, is higher rates. “While a borrower is able to get money quickly, he or she pays a premium for that in the form of higher interest rates,” according to Rohit Arora, Chief Executive of Biz2Credit.

Nobody ever said it should be easy for small businesses to secure the funds they need to help finance their growth. But, it’s not that difficult to improve the odds in their favor.