Dave Godsman is CEO of fora platform that enables medium-sized companies to access capital by connecting with the right lenders.
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Average approx 80% of all small business loans are being refused. When considering loans for companies that are minority-owned and underserved or that exceed $1 million, that rejection rate climbs even higher. As we continue to face economic uncertainty and high interest rates, financial institutions have further tightened their credit space, making it even more difficult for companies to access the capital they need to grow.
However, I believe that the leaders and founders of these companies work too hard and have made too many sacrifices to “wait and see” for the right loan partner, or to settle for one that is not right for their business. Seizing growth opportunities as they arise is critical to the long-term success of any business, regardless of the state of the economy. It’s not just businesses that depend on commercial loans to grow either; it is also in the interest of lenders to maintain the flow of commercial loan agreements as they depend on the repayment of said loans to maintain a steady flow of capital.
So, how can companies position themselves to let financial institutions fight for their business instead of the other way around? Based on my experience in the lending industry, here are five considerations to keep in mind as you begin your capital raising journey.
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1. Tell a compelling story.
“So, tell me about your business.” This is often the first question lenders ask because it is their first impression of a company beyond the application. Getting this first point of contact right is a critical first step towards obtaining a commercial loan, but it is often overlooked.
To make a strong first impression, go beyond the financial documents and business plans detailed in your application and share the story behind it all. Why did you start this company? What is your mission? What distinguishes your company from competitors? Keep your story concise, but don’t be afraid to get personal – lenders sift through thousands of applications each year, so anything you do to humanize your business and make it stand out can increase your chances of getting a loan.
2. Provide the correct documents.
Ultimately, lenders try to evaluate your business and determine if it’s a good investment. The best way to do that is to review important business and financial documents. When a business owner fails to include the documents necessary to properly evaluate their business, or includes irrelevant documents and information, it only expands the commercial lending process and decreases your chances of approval.
While there is no mandatory list of required documents, you should be prepared to provide the following:
• Three years of business tax returns or statements prepared by an accountant.
• A set of interim financial statements that reflect your current situation (ie balance sheet, income statement and cash flow statements).
• A business plan detailing your products/services, competitors, forecasting models, proforma and details of how the loan will be used.
• Legally binding business documents such as licenses and articles of association.
• Personal financial documents proving your income (ie federal and state tax returns).
3. Work with a lender who is familiar with your industry.
Commercial lending has traditionally been a relationship or geographic process. When raising capital, many entrepreneurs turn to lenders with whom they have an existing relationship from their personal lives or previous business ventures, or they simply go to their local bank. However, just because a lender is conveniently located or you’ve dealt with them before doesn’t mean they’re the best fit for the credit needs you have today.
A lender unfamiliar with your industry and the nuances associated with it may underestimate the health of your business and view it as a risky investment. During economic volatility, some lenders may even be instructed not to lend to your industry as a whole. A knowledgeable lender, on the other hand, has the background necessary to properly assess your business and its potential. When you first deal with a lender, be sure to ask if they have experience in your industry and don’t be afraid to ask for references.
4. Take advantage of technology.
Essential as they are, the first three tips on this list are often easier said than done, especially in the face of economic instability. Fortunately, commercial lending is currently undergoing a long overdue digital transformation.
A quick Google search will find a number of digital lending platforms, many of which are lender-funded, making them free for business owners. When evaluating, know that many will focus solely on speeding up the loan process, but look for those who also deliver an objective and data-driven process with a wide variety of loan partners – from top national banks to community banks, credit unions and alternative lenders.
Being able to choose between lenders who have proven expertise in your industry and a strong reputation will go a long way, but the level of customer service will also vary. Finding a platform that offers experienced customer service, such as having access to former relationship managers of top borrowers, can help you understand every step of the loan process so you can make your final decision with confidence.
5. Keep your foot on the pedal.
While all of this advice can help you take better control of your commercial credit journey, it doesn’t change the fact that commercial lending is a complex process with many variables beyond your control. Even the strongest companies find it difficult to get financing in an uncertain economy, and it can be easy for entrepreneurs to receive several rejections and become discouraged or even postpone their search altogether.
But no matter what state the economy is in, entrepreneurs have more choice than they think. In the end, there will always be capital up for grabs; it just takes foresight, action, discipline and persistence to find it. And those are all traits that entrepreneurs already have in spades.
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