When seeking business financing, it is important to conduct a thorough evaluation of your business and educate yourself about the many financial options available. Here are five steps that every SMB owner should take before selecting a commercial lending solution:
1. Find Out What You Don’t Know
Especially for first-time borrowers, the complete commercial lending landscape may be overwhelming or entirely unknown. You are busy running your business each day and may not keep up with the business financing options presently on the market. But when financing is needed, you should assess what you do and don’t know about financing and be prepared to look at options that go beyond the bank.
As a first step, jot down your basic understanding of traditional lenders versus alternative banking providers. What are the differences between a traditional small business loan and factoring services? How do costs compare? Next, think through what you need financing for and how financing can help your business. Then you will want to start conducting research online to find out more about traditional bank financing and non-bank lending. Compiling a list of questions about what options may work best for your business will create a framework to help you begin your research.
2. Do Your Due Diligence
Financing is a big decision. You should conduct due diligence of the specific financial providers you have an interest in pursuing. Many traditional options like bank loans are reliable, but they require extensive credit and revenue histories that some owners may not have. On the other hand, online lending services are quick but have strict parameters and offer little guidance.
Not all commercial lenders adhere to the same standards of service and owners must do their best to identify a trustworthy provider that has demonstrated success. Tap your own professional network for reliable referrals. Also, check out reviews and look for current examples of companies similar to yours in size and industry that the funder may have worked with previously. Industry or association affiliations are also good ways to vet financing companies that may not be as familiar to you as banks and credit card companies.
When meeting with a prospective financial provider, don’t be afraid to ask tough questions about the provider’s expertise and fee structure so you can find the most transparent financial provider that will work with your needs.
3. Review Your Current Position
Reviewing past financial performance, refreshing company expectations and assessing growth objectives will help you to make an informed decision on the level of financing needed. Being prepared to discuss the company’s current position in detail, and provide appropriate documentation as required, helps the financial provider make the most informed decision about funding the business and expedites the funding process once the best solution is determined.
The documentation required often includes but is not limited to:
- Articles of incorporation/ organization;
- Amendments related to the structure of the business;
- Proof of recent tax payments;
- Balance sheets;
- Income/ cash flow statements and debtor reports
Identifying a contact at the finance company is a good way to get answers to questions or receive guidance on the documentation you may need during the process. Demonstrating preparedness to commercial lending providers gives you the best opportunity to find the right financing for your business and helps give financers a clear view of the risks versus reward associated with taking on your company. Those who cannot present a clear picture of their business to providers will appear unable to meet the requirements of a financing agreement or too great a risk to take on.
4. Consider Your Priorities
The characteristics of traditional and alternative banking differ significantly, so look carefully at all your options to determine what aspects of a financial solution matter the most to you. For some owners, the speed of a transaction is a priority, while for others flexible financing terms may take precedence. Owners looking for longer-term solutions that can grow with their business needs may prioritize a close relationship with a financial provider that has industry-specific expertise.
Taking the time to realize the characteristics of a financial solution beyond the dollar amount will help to ensure a smooth and productive financial partnership.
5. Visualize the End Result
Some owners may seek financing to address an immediate issue, but such a decision could prove to be a temporary fix that doesn’t address long-term business concerns. Before selecting a financial solution, try to look beyond the initial purpose or need for financing and visualize the end result by asking yourself the following questions:
- Could the solution open opportunities to attract more customers, retain employees and increase the bottom line?
- Will the solution stabilize the company's position and increase the likelihood of gaining access to other forms of financing in the future?
- What fits my business best, alternative banking or traditional commercial lending?
For most small to medium-size business owners, selecting a financial solution is a major, long-term commitment. If you’re educated about the options and thorough in your search, cognizant of your current business and forward thinking about its future, you will find a solution that best suits your immediate needs and promotes long-term business success.