What do you do, asks Investment Manager Bill Girard, if you can't point to proven profitability as one of the strengths of your business loan application? Many small business owners, in fact, face this dilemma when they have to approach a lender without being able to present a history of profitability.
I always appreciate it when a loan applicant acknowledges the facts of the matter—be it operating losses or working capital shortages—and can present the fundamental strengths of their application. These strengths might include a sound business model, a strong management team, adequate collateral, and a solid financial projection. An astute lender can and will look beyond a financial statement's “red ink” and “conventional financial ratios” to determine whether a loan application warrants investment.
Over my many years of lending to small businesses, I have consistently found that it's certainly not proven profitability, high net worth or massive amounts of collateral that determine the strengths of a loan application. I look as much at indicators such as trends in sales and market share, demonstrated management competencies, and of course supportable income statement projections. I'm looking for elements that allow me to conclude whether or not this is a financially sound business opportunity in the future.
Here's some advice: Do your homework and come to a lender well organized. Present important documents such as financial statements, a business plan or summary of your business, and written details of the program to be financed. Come ready to answer questions, especially difficult ones. Avoid pie-in-the-sky numbers that are very difficult to substantiate. If you don't know the answer, don't wing it. Say you will get back with more details later.
Don't expect your lender to take the time to seriously consider your application if you haven't properly prepared yourself. By presenting your business in an organized fashion and responding quickly and thoroughly to questions, you'll give lenders a glimpse of how you might be running your business.
At Ecotrust Canada Capital, most of our loan applicants don't come to us with stellar balance sheets or high personal net worth. And I have to admit that sometimes it takes “thinking outside the box” to structure a loan that fits the needs of both the lender and the borrower. But time and time again we make loans that are based on projected, not past, profits. We also consider the character of our clients. This may sound old-fashion but it continues to work for small business lending.