For new business financing, think like a lender

Improve your chances of securing a loan by understanding how lenders work

Ron Bertolucci

Thanks to an improving economy, industry experts forecast growing optimism and confidence among new business owners. But as the saying goes, “it takes money to make money.” If you’re serious about financing your new business, you’ll improve your chances if you understand how lenders work, learn what they are looking for and how you can alternatively help yourself in the early stages of your business.

Lending is a business, too
First, understand that lenders need to be cautious; they’re in the business of lending money and do their best to weed out risky borrowers. So although you might have the best new business idea, your potential lender will require much more than ideas.

Know that credit unions and banks are set up to use the funds from their depositors to make loans. The typical financial institution needs to make good loans 98 percent of the time – less than that and they won’t be able to effectively manage their operations.

Show ability to repay
Second, you must be able to demonstrate your ability to repay the loan. Lenders favor businesses with collateral, profits or long-term success that can demonstrate their ability to repay their loan. If you can’t do that, try to compensate by providing an excellent business plan and detailed marketing strategy that shows how you’ll make money and pay for the loan.

Unknown factors
As a new business owner, you may not know the potential problems and pitfalls that can afflict new businesses, but lenders have seen the typical difficulties and challenges that commonly arise for new businesses – and likely more. Lenders may want to make provisions in the application process to mitigate any potential issues. Addressing issues up front and discussing worst-case scenarios helps the lender understand you are aware of the challenges.

Be resourceful
If you’re not getting approved for financing, you can always tap your own financial resources in the short-term to build your business and establish strong financials. In the first three years when costs can be quite low to get a bare bones operation off the ground, personal financing options are a great alternative. Personal savings, equity positions held, or borrowing from friends or family are all great funding sources that will allow your business to develop an income stream – a key factor in demonstrating your ability to repay your loan.

Other options include borrowing from the many online small business lenders willing to take on greater risk for a higher return; using resources from inside your industry such as suppliers providing short-term funding for purchases; or utilizing factoring companies. Taking this step will also put you in good standing for the next financing event most businesses face – the growth stage, which arrives about three to seven years after launching.

Get started
Start by speaking with a knowledgeable lender about the loan process. Check with the credit union or bank you already use for your personal finances. They’ll respond more favorably than a financial institution that doesn’t already have an existing relationship with you.

To learn about the business lending process, SBA.gov, the local office of Service Corps of Retired Executives (SCORE); the Small Business Development Center (SBDC), or resources at your local college or university are all good places to start.

Ronald L. Bertolucci is vice president and manager of business lending for Columbia Credit Union. He can be reached at 360.619.3066 or ronb@columbiacu.org.

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