Since Dealstruck’s launch in 2013, we have financed hundreds of small businesses across the U.S. and have seen many more apply for capital to expand their operations, solve cash flow issues, keep up with quick inventory turnover, and ultimately increase customer reach and acquisition. In conversations with applicants about their business performance, we’ve come to understand the most important elements that make up the DNA of the best loan candidates.
As you explore different loan options among a variety of traditional and alternative lenders, here are 5 tips to make your company attractive and compelling:
Tip 1: Avoid Racking Up Costly Debt Financing
Be wary of how you manage the short-term and long-term costs in your current financing structure. Borrowers can find themselves bearing the heavy load of debt financing. For example, funding your company with merchant cash advances (MCA) and credit card balances can strap you to unwieldy Annualized Percentage Rates (APR) and associated fees. In balancing their priorities, small businesses tend to increase credit card balances or renew their current MCAs. These habits can reflect poorly on your loan application.
Remember, the purpose of your business isn’t to worry about unhealthy debt, but instead to reach financial sustainability. Hold off on expanding too rapidly and focus on trying to pay down those debts. We see a lot of companies that are putting themselves out of business by taking out numerous MCAs in a short timeframe without understanding how costly the paybacks will be.
Tip 2: Be Honest With Your Taxes
Honesty is the best policy, and honesty can help you become a great loan candidate in the long- run.
In underwriting a loan, lenders often see owners tempted to minimize their tax liabilities by under-reporting revenues and over-reporting expenses. This shortcut approach creates a big problem for lenders: when we try to accurately evaluate your financial performance, we notice the enormous fines placed on borrowers after being audited by the Internal Revenue Service (IRS). Moreover, the IRS can place large tax liens on noncompliant businesses. Although you may have to pay slightly more in annual tax payments, we encourage you to accurately report your financials, saving your company from unnecessary time wasted, money forfeited, and legal consequences.
Not only will honest reporting enable you to get financing at a much lower rate, it will also protect you from fines that result from IRS tax audits. Accurate financial reporting also helps you to better understand your business's financial condition — such as costs that you can cut down on and specific products and services that generate the most revenue — and where you truly have cash flow needs. This leads to our next point.
Tip 3: Get Consistent With Managing Your Financial and Accounting Records
Your business looks as good as your books. To be a mature business in a lender’s eyes, hold yourself and your team accountable to the highest standard of fiscal responsibility. Companies may employ a great business model, beat out the competition, and produce exceptional profit margins and steady revenue, but unless they can communicate their financial history and projections clearly and sufficiently, the process of getting capital will be burdensome. This means all of your paperwork should be straightened out, easily accessible, and well-documented. Possessing a strong grasp of your books helps lenders understand your collateral, character, assets and debt, and overall track record.
We recommend hiring a Certified Public Accountant (CPA). Investing in a CPA will ensure that your records meet proper industry standards and are managed properly. Remember, your goal is to expand your business and build customer loyalty. If managing your own books is your Achilles’ heel to the loan application, your best bet is reaching out and finding someone else to do it for you.
Tip 4: Minimally, Break-Even!
Strong cash flow is one of your most convincing arguments for securing a loan. Make sure cash flow can support your current level of expenses before expanding too rapidly. It's normal for company owners to want to expand and grow when they see that they are profitable. Problems arise when companies expand too fast – or deploy too much cash on expansion payroll or marketing – without the cash flow to support these expenses. Realizing your return on investment may take a while, so be sure to do the due diligence in understanding your (1) current cash flow, and (2) cash expenses after any type of expansion.
As you review your business performance and research loan options, you may find that reaching or moving beyond the break-even point is impossible without more capital. This financial awareness is crucial to not only securing capital, but to finding the right kind of capital.
Tip 5: Clearly Describe Business Objectives
Can you clearly describe your business objectives? Let’s take a short quiz and answer the three questions below:
- What do you plan to do with the money?
- What return do you expect on your money? Why?
- What obstacles – internal and external – pose the biggest risks to your company?
Lenders want assurance that you know your business inside and out. Unless you know where you’re taking your company, lenders definitely won’t either. We’d love to see you succeed – and this involves being able to describe succinctly, reasonably, and passionately to us what success looks like.
The Dealstruck lending marketplace connects profitable, small- and medium-sized businesses (SMBs) with innovative credit solutions. Unlike the one-size-fits-all approach offered to them by banks and the high-cost, short-term credit offered to them by alternative lenders, Dealstruck provides growing SMBs with a suite of products that give them a credible and transparent path to bankable. Dealstruck is the first online lending platform to offer multiple products to SMBs, and the first to allow investors the freedom to choose specific investments. For more information, please visit https://www.dealstruck.com/.