thedenverchannel.com recently reported that only 5% of lenders have eased their standards to loan to small businesses. This confirms what many small businesses already know – it is tough to get funding. So what is a small business to do when it needs money?
If your business needs a loan to survive, there are several things that you should do as a small business owner first. While these strategies cannot guarantee a loan, they can help you have the best chance to secure funding when you need it.
1. Get your personal credit in order. If you are borrowing money from a financial institution, the institution is going to want to see your personal credit unless your business has substantial assets and financial backing. In most cases, you will need to personally guarantee the loan. If your credit score is low, you have had recent bankruptcies, or you are requesting a large loan amount and have no collateral, you may need to look at other funding sources.
2. Have a good business plan. Banks want to know you have thought about your business. The lending officer will want to see the business plan and know that the financial targets are achievable. As part of the business plan, be able to clearly define where the funds will be used. If you can’t explain your business and its goals (and why you have), a bank can’t determine what type of risk you are.
3. Have good tax and legal records. Make sure you have copies of your Articles filed with the Secretary of State and any periodic reports (and make sure your periodic report has been filed!). Have current bylaws or an operating agreement. Have proper paperwork between the owners of the business. Have intellectual property agreements when needed. Have copies of the business’s tax returns for at least the previous three years (and maybe up to five). If the business is closely held (especially with fewer than four owners), have copies of the owners’ personal tax returns. Make sure all local, state, and federal taxes are current – including employment taxes and unemployment insurance. Finally, do a checks to see if there are any liens or UCC filings.
4. Lastly, schedule a small business checkup with your attorney and your CPA. I can go through all your paperwork and see what is missing from a legal perspective, make sure everything is up to date, and then be a reference for the bank to call with any questions. A CPA would be able to do the same thing from a financial perspective.
If you have any questions, don’t hesitate to call me, your small business attorney serving the Denver Metro Area, the Front Range, and beyond at 720-258-6647.