Five Critical Steps to Securing Small Business Capital

By Stephen D. Umberger, SBA’s Baltimore District Director

Cash flow is the life blood of all small businesses. Cash flow allows a business to make payroll, pay
suppliers, and keep its doors open. We have been told that there is a credit crunch and that small business
lenders are no longer extending lines of credit to their customers. As this state’s strongest advocate for the
small business community, I believe it is critical to understand the true facts about small business’ access to
capital in the current economic climate. Recently, the SBA assembled a blue ribbon panel of experienced
commercial lenders to brief us on the current credit market, and to find ways to help our small business
community survive these turbulent economic times.

All of the lenders agree that capital is still readily available to credit worthy small businesses. The lenders noted
that they are performing more due diligence on loan applications today then they did six months or a year ago.
We were told that in the current economic environment small business borrowers are more wary to take on
new debt and have seen their revenues and liquidity drop severely over the last few months. Business owners
that are too highly leveraged may have difficulty taking on new debt, even if that debt is critical to the survival
of the business.

The panel of lenders provided us with five critical steps that small business owners can take to help secure

1. Borrowers must be credit worthy. Small business owners must avoid depleting their current
liquidity or cash position. They must immediately deal with negative financial issues including poor
or inaccurate credit reports, and must resolve all business and personal tax issues. A negative
credit report and/or credit score can be a “deal buster”. Back taxes, liens, garnishments, multiple
bounced checks all show increased risk for a lender. Borrowers should deal with recent
bankruptcies by providing an explanation of why it occurred. Address all of these issues prior to
applying for the business loan.

2. Immediately develop a stronger business plan. The panel of lenders stressed that a business
plan must be well thought out, and realistic. The business plan should outline the money,
management, and marketing of a business. One lender stated “I need to understand that you
understand what you are getting into.” Borrowers must explain how the money will be used, and
how will it be repaid. Repayment ability is the critical factor. Without repayment ability, no lender
will make the business loan. Few, if any, lenders provide 100 percent financing.

3. Plan for the worst case scenario. All lenders require borrowers to provide a minimum of 12
months of financial projections. These projections should be broken down into a month by month
format. The business owner must understand how these assumptions were developed, and
establish their validity. All lenders agree that the projections must be presented with a best case,
mid-case, and worst case scenario. How will the business survive if revenues nose dive by 10
percent, 20 percent, or 30 percent over the next 6 to 12 months? There are no crystal balls to
answer this question. This “hands-on” forecasting will help the borrower become more strategic in
their thinking, and help the lender feel more comfortable with repayment ability.

4. Two Years Business History is necessary. The lenders made it absolutely clear that they were
looking for established, financially strong, quality businesses to lend to. Working capital loans are
becoming harder to approve, and lines of credit were being tightened or not extended. Loans to
start-up businesses are more difficult to approve in the current economic climate. Lenders may
require an additional cash equity injection by the owner, or even a seller carry back, to reduce the
size of the loan. A proven franchise concept may help mitigate any risk.

5. Time to become a hands-on owner. This is not a time for business as usual.

  • Collect accounts receivables in a timely manner – don’t allow your customers to drag out the
    payment terms. If necessary, get in your car and visit the customers that have not paid timely
    and have large amounts of outstanding money owed to you.
  • Don’t keep all your cash liquidity tied up in inventory. Review your business operations to see
    what work can be handled in-house and not contracted out.
  • Review each business expense item and eliminate discretionary expenses that could help
    generate additional cash flow.
  • Eliminating unprofitable account relationships could also help the bottom line. Increase your
    efforts to market your business.
  • Cutting new marketing expenditures may be a mistake. Many business owners make the
    mistake of cutting marketing expenses when business slows. That might be the wrong decision
    to make.

Access to capital is critical to the survival of many small firms across Maryland. This is especially true
given the upcoming holiday shopping season. Though small business loans are still being made to credit
worthy borrowers, many business owners do not comprehend what lenders require in a loan application.
Their chances of securing a loan are better if they follow our Five Critical Steps to Securing Small
Business Capital. The SBA has taken a statewide leadership role in advocating for the small business
community during these uncertain economic times. The SBA remains committed to helping our small
businesses weather the economic storm and prepare for brighter days ahead. Small business owners that
have questions about obtaining a loan, or need assistance with other business issues, should contact the
SBA Baltimore District Office at (410) 962-6195.

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