Fire your Accountant & Hire a Partner

Your small business needs Cash? But are you cash worthy?

Posted on 04 May 2010

So you need money, who doesn’t?  There are millions of businesses that can use the extra cash to launch to the next level or get off the ground…but they don’t all get it.  You need to know what lenders and even equity partners seek in a business.  They all want the same thing, you! So you had better measure up, here is how……..

What do lenders look at when considering you? You, the business owner are viewed as “credit or equity risk”.  Yes, risk….if you don’t perform as you say you will, your small business fails.  If you don’t have a track record of success, the risk increases.

For most banks and angel investors, your quality is measured by the five Cs of credit: character, capacity, collateral, conditions and capital. Look closely at each one to make sure you can shine when the question comes.  Don’t be afraid look for you’re an example of where you demonstrated the following qualities.

1. Character

To your potential lender, character means that you put in maximum effort to repay the loan. They are looking for a good manager, honest and come with a solid reputation as a leader. So don’t be shy when sharing your personal strengths and weaknesses.  They want to see character in your actions, behavior and mannerisms.

2. Capacity

This is another fancy word that means, do you have good cash-flow? Can you repay the loan? This is where you had better understand your financial projections; did you budget properly?

Check out the my previous blog, it has some Budgeting basics. Yes, you have to go and read it. Consider this example a minimum: if you can’t create a financial projection by yourself hire someone to help you.

But, and I mean a big but….if you can’t repay the loan, what will you do?  Your lender wants to know. They will ask about other income, investments, and spousal income. Do you have a job you can go back to if the business fails or is this your only shot?  (risky) Get ready to give solid answers to these questions and back it up.

3. Collateral

OK back to if you fail….I know this seems to dwell on failure a lot.  But if a lender has to foreclose, will your collateral cover the loan? Is the collateral something that sells easily and fast? If the answer is no, then find a co-signer, someone who will pledge their assets as collateral for you.  Family or friends may help you.

Good collateral includes: your home or other real estate, cash value of life insurance policies or securities like stocks and bonds. What this really means to you is that if your business fails, you are the one with most of the risk.  Your lender will quickly grab any asset you put up as collateral if you fail.  So don’t fail, don’t give up, never surrender until you succeed!

4. Conditions

These items are all the things you have no control over, the wild card. They include: trends in the overall business economy, the trends in your community, the seasonality of your business, and how your product or service fits into these trends. They will also look at your competitors, how well you can compete against them, what they may do when you compete against them?  Get ready to share you plans to crush the opposition and win the market with your fabulous strategy!  Then knock them out! Boom…..

5. Capital

Hey what have you done for this business?  No cash of your own?  Your lender will say, “hey man, if you are not committed financially, then why should I be?  Lenders know that if your business goes sideways, it will be easier for you to quit, if you do not have your own money at risk.

Time to dig deep, do you best to find as much of the needed cash as you can afford to put up. Don’t expect any lender to give you 80 percent or more of your required cash. Statistically small businesses fail and when they fail, lenders have trouble turning assets into cash to cover the loan. To a bank or most standard lender, new business is a much higher risk for them than a home loan. Don’t expect them to be so generous and expect to pay a much higher interest rate.

Most importantly…..do you homework. There is no shortage of information on how to present yourself and what you need to be prepared, just read the last blog post………Seriously read it, if you need cash…..read it.

On your team,

Mark