… When a Small Business Needs a Commercial Loan
By Sam Slater
Small businesses typically start out “small” in just about every regard. In order to grow they will need capital. A potential source of capital might include an equity injection from the owner(s) and/or partner(s). Many small business owners inject capital from their own savings, sometimes retirement (401K), home equity loans on their residence, cash surrender value of life insurance and even credit cards and unsecured credit lines. They generally have a “whatever it takes” mentality to get the business off the ground and up and running.
At some point however, it usually makes sense for the business to borrow funds on a commercial basis to promote further growth and expansion. Most small businesses are ill-prepared for this transition. In order to save money, or avoid using capital more critically needed elsewhere, small business owners become their own accountants, attorneys, marketing directors and more. Failure to set up a proper financial reporting system and hire a CPA is a common mistake, and one of the worst, a small business owner can make.
You need solid financials when it comes to seeking out a commercial loan. I don’t mean just from a profitability standpoint. Your financials should be a detailed, accurate and current accounting of the income, expenses, assets and liabilities of your business. First and foremost, you should want it this way so you can make intelligent, accurate assessments of where your business stands financially at any point in time. It’s very difficult to manage your business financially if you don’t know what your numbers are until April of the next fiscal year!
When you go to a commercial lender to apply for a commercial loan, they are going to have some expectations. One of these is that you are prepared to disclose the financials of your business. For small businesses this is usually a combination of their filed IRS tax returns and in-house reports detailing YTD finances. They will expect you to be able to produce up-to-date reports including a profit & loss statement, balance sheet, accounts receivable and payable agings, and inventory listing. If you don’t have the ability to produce these, it tells the lender that you aren’t managing your business. Their enthusiasm for your loan request will not be very high.
Many businesses still operate their finances with the “shoe box” accounting method…..stuff all the receipts in a shoebox and give them to your tax preparer two days before April 15th. (If you’re laughing because this is you, then this article is for you!) In todays’ day and age, technology/software is available to businesses of all sizes, no longer just for large corporations who have the financial resources to afford it. Businesses of all sizes, especially small businesses, can and should take advantage of the myriad of accounting software packages available to track their financials. This is a critical component to operating their business and achieving financial success. As I stated earlier, borrowed capital becomes a viable and desirable option for many businesses to continue growth. I recommend you prepare yourself for this from the very start. I always say there is no substitute for professional help. This is no truer than when it comes to the finances of your business. Hire a CPA and let them advise you and recommend a system/software to track and manage your financials and you will be prepared when the time comes to borrow commercial funds for your business.
Sam Slater is the CEO of Crystal Brook Commercial, a commercial loan broker and financing consultant. Crystal Brook Commercial specializes in assisting businesses and property investors in obtaining commercial financing and advises on the structuring of commercial debt to optimize cash flow and promote growth.