Steps entrepreneurs should take when navigating the lending process

Over the years, one of the most asked questions I get from entrepreneurs is what grants are available for new businesses and how do I get a business loan. Securing business capital can be frustrating and defeating for many individuals that have had the dream of turning their unique idea into a new small business. Grants are mostly non-existent for most startups unless your local community organizations or government agencies offer financial incentives. To help reduce barriers for startups, the U.S. Small Business Administration (SBA) recently launched its new working capital line of credit to better meet the needs of our small business customers. 

The agency’s Working Capital Pilot works through existing SBA 7(a) lenders using an innovative structure to give business owners and lenders more affordable loan options and flexibility.  These enhancements include transaction-based loans to help businesses fund individual projects and/or orders earlier in the sales cycle.  The pilot also provides asset-based loans to help business owners borrow against existing assets for specific purposes such as export related sales, and the Home Energy Rebate program which was funded by the Inflation Reduction Act. 

Even with this new pilot program, experienced business owners know they need to set financial goals to keep their company on track. The following are five simple steps entrepreneurs can take to help navigate the lending process. 

Know your tolerance for financial risk. Starting a new business brings a certain level of inherent risk. There are no guarantees that the business will be successful, or make a profit, in its first few years of existence. Be prepared for an emotional roller coaster and brace yourself for periods of financial uncertainty.  This is especially true if you are using personal savings, a 401(k), or a home equity line of credit to fund your venture. Know your level of risk aversion up front and have a plan to counter possible losses.   

How much money does it really take to start a business? Unfortunately, most entrepreneurs create revenue projections that are far too optimistic.  Many business owners underestimate expenses and establish breakeven timeframes that are too short.  Work with an experienced business counselor who can help create revenue projections that are realistic and accurate. 

Commercial lenders are literally banking on your future success. Most lenders loan money based on factors such as repayment ability, credit history, and borrower experience. Even a compelling business plan may not overcome a borrower’s poor or marginal credit history.  It may take two or three years of actual operations before a new business loan will be based solely on the company’s credit and financial history. However, there are many local organizations such as Community Development Financial Institutions (CDFI’s), Microlenders, and Small Business Lending Companies (SBLC) that have eligibility requirements that are start-up friendly. 

Learn to read and understanding basic financial statements. The income statement, balance sheet, and cash flow statement each tell a different part of the story about a company’s financial condition. Together, they can be used to discover a business’ weaknesses and strengths.  Lenders use ratios derived from various sections of the financial statements to provide clues to where a business owner needs to implement corrective actions before a situation becomes alarming. 

Cash flow is the life blood of a business.  A business can be profitable on paper yet fail from a lack of cash flow.  Important aspects of cash flow include the timing of accounts payable and receivable, inventory turnover, fixed expense loads, and variable costs.  Without a solid foundational knowledge of these areas, a business owner is handicapped in terms of managing the company’s overall financial health. 

President Biden’s Economic Boom is real and entrepreneurs across the country are starting businesses at record rates, hiring American workers, and making our communities stronger.  The time is right to start a new small business, but establishing the right financial expectations can mean the difference between a failed opportunity and a successful lifetime adventure.  

For more information on starting your small business, please visit www.sba.gov.  

Aikta Marcoulier serves as the SBA’s Regional Administrator in Denver. She oversees the agency’s programs and services in Colorado, Montana, Utah, North Dakota, South Dakota, and Wyoming.