BY WAYNE MATSUMURA
The right financing at the right time is critical for small businesses to succeed.
BY WAYNE MATSUMURA
The right financing at the right time is critical for small businesses to succeed. Young businesses, however, have distinct challenges because they have little or no revenue history, lack collateral, and hold limited cash resources. Yet lenders typically require these very things to qualify a small business for financing. It’s no secret—securing financing can be one of the biggest obstacles entrepreneurs face.
According to a recent Pepperdine University study, 60% of small businesses report a lack of financing is hindering growth, and 50% say it’s stifling the ability to add new hires. But here’s the good news: small business owners can still position themselves as attractive candidates for financing. Below are a few tips that may serve you as your business works to build strong performance over an extended period of time:
Tip #1: Demonstrate sound personal financial management history.
Without a strong history of revenue or sales, a business owner’s personal financial history is one of the most important factors lenders will consider to determine suitability for financing. Personal financial management is often a good indicator of how well a person will manage a business. In particular, lenders may consider how wisely an owner uses personal lines of revolving credit and whether there’s a history of maintaining strong liquidity for unforeseen contingencies. As lenders know, these elements go hand-in-hand with starting and establishing a successful business.
Tip #2: Maintain a strong deposit relationship with the lending financial institution.
It may be easier to access financing through a lender with whom your business has a deposit relationship. Such a lender will be able to review your business’ deposit accounts to get an overall sense of monthly cash flow and whether your deposits are sufficient to cover your expenses. To ensure your business can leverage its deposit relationship effectively, it’s very important to maintain strong average account balances and not accrue overdraft fees or non-sufficient funds statuses. The stronger your deposit accounts are, the more likely a lender will approve financing in the absence of other historical business data to analyze.
Tip #3: Build longevity with a lending institution— it matters.
Trust is at the heart of any relationship, including the relationship between a lender and a business; you need to trust the lender, and a lender must trust you. Like any relationship, this trust takes time and familiarity. At Unitus, we place a high priority on helping our member-entrepreneurs succeed. The longer our financial partnership with a member, whether personal or business, the more relational context we’ll have for determining the suitability of financing. In an era of big banks and tighter lending restrictions, partner with a financial institution that values personal relationships and stick with that institution for the long haul. It will likely pay dividends when you need it most.
Tip #4: Recognize the importance of vision and leadership.
For young businesses, securing financing isn’t just about looking good on paper—as important as that is. A good lender views a financing opportunity as a long-term investment with possible risks, as well as rewards. As a result, it needs to believe in the person (or people) and the vision behind your business. If your company lacks a record of success, a lender will carefully consider whether your business plan is compelling and sound—and whether you have you have the ability to execute it successfully. The less information available to analyze, the more important these considerations will be to the lender.
Case in Point
When Rob Taylo needed financing to grow his high tech business, SinglePoint Communications, he faced the same challenges most entrepreneurs face early in their enterprise. SinglePoint was a young business, with little revenue history or record of sales. What’s more, the year was 2008, a time when lenders significantly scaled back lending. Despite these factors, Rob secured financing through Unitus because he:
- Demonstrated sound personal financial management
- Maintained a strong business account relationship with Unitus
- Had built the trust that comes with longevity as a long-time Unitus member
- Displayed the vision and leadership qualities essential for success
Six years later, SinglePoint is a strong local employer in Portland with a growth trajectory of 20-30 percent each year.
Are you a small business owner with growth in mind? Remembering these four tips and acting accordingly will help put your business in the best possible position to finance the future.
Wayne Matsumura is the Business Services Manager at Unitus Community Credit Union.
