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Securing capital is one of the most important parts of growing a business, and when small business owners have tapped dry the well of friends and family they often turn to financial institutions to fill in the financial gaps.
The outcome of a pitch to a bank or credit union can have a huge impact on a small business, but there are a few mistakes that independent entrepreneurs often make when asking for the big bucks.
Cliff Ehnes, the president of community engagement at Interior Savings Credit Union, says there are a few things business owners can do to help tip the scales in their favour.
He says lenders will definitely want to see any historical financial statements from the business, but more importantly, they will want to see the business’ growth plan.
Lenders want to understand the businesses they give money to, he says, but they really want to see that the business owner understands exactly what they’re doing, and where they’re going.
“What we really want to see is a business owner thinking about what is going to happen in the next year, or five years,” he says.
And although it may seem obvious to plan well before waltzing in and asking for cash, Ehnes says a lack of proper planning and understanding is the biggest mistake he sees.
“I think small business owners sometimes struggle in that area. They come in and they think ‘I need a loan,’ but they haven’t thought about the story behind it: why do they actually need it?”
Ehnes says before asking for money a business owner should be able to tell the story of their business: what they do, why they do it and what exactly they plan to use the money for.
“It doesn’t have to be 1,000 pages, it could be something as simple as a spreadsheet. But what you want to show it that you’ve thought it out,” he says.
That being said, Ehnes warns that lenders are also going to want to see sound financial statements, and ones that weren’t prepared in house.
Banks and credit unions don’t have access to a business’ books, he says, so if an outside accountant has signed off on its financial statements – and done so in a timely manner – it gives them more confidence.
That seems to be a big sticking point for lots of small business owners. Ehnes says there’s a “real reluctance” on many entrepreneurs’ parts to “engage in professional services” like accountants and lawyers.
But lenders absolutely want to see that business owners are properly protecting themselves. Without using lawyers or accountants, he asks, how can a business owner properly understand liability, or their appropriate tax structure?
“One thing credit unions and banks are is we’re not venture capital organizations. So when we look at something we look at it from a risk perspective,” Ehnes says.
He points out that their money actually belongs to their depositors, and those depositors have an expectation they won’t take risks with it.
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