Steps Entrepreneurs Should Take When Navigating the Lending Process

For years, one of the most common questions I’ve been asked by entrepreneurs is what grants are available for start-ups and how to get a business loan. Securing business capital can be frustrating and daunting for many who dream of turning their unique idea into a new small business. Grants are largely nonexistent for most startups, unless local community organizations or government agencies offer financial incentives. To help reduce barriers to startups, the U.S. Small Business Administration (SBA) recently launched a new working capital line of credit to better meet the needs of our small business clients.

The agency’s Working Capital pilot program operates through existing SBA 7(a) lenders using an innovative structure to provide business owners and lenders with more affordable loan options and flexibility. These enhancements include transaction-based loans to help businesses finance individual projects and/or orders earlier in the sales cycle. The pilot also provides asset-based loans to help business owners borrow against existing assets for specific purposes, such as export-related sales and the Home Energy Rebate program, which was funded by the Inflation Reduction Act.

Even with this new pilot program, seasoned business owners know they need to set financial goals to keep their business on track. Here are five simple steps entrepreneurs can take to help navigate the loan process.

Know your financial risk tolerance. Starting a new business involves a certain level of risk. There is no guarantee that the business will succeed or turn a profit in the first few years of existence. Be prepared for an emotional rollercoaster and prepare for periods of financial uncertainty. This is especially true if you are using personal savings, a 401(k), or a home equity line of credit to fund your venture. Know your risk aversion level up front and have a plan in place to address potential losses.

How Much Money Does It Really Take to Start a Business? Unfortunately, most entrepreneurs create revenue projections that are far too optimistic. Many business owners underestimate expenses and set break-even time frames that are too short. Work with an experienced business advisor to help you create realistic and accurate revenue projections.

Commercial lenders are literally banking on your future success. Most lenders lend money based on factors such as the borrower’s ability to repay, credit history, and experience. Even a convincing business plan may not overcome a borrower’s poor or marginal credit history. It can take two or three years of actual business before a new business loan is based solely on the company’s credit and financial history. However, there are many local organizations, such as Community Development Financial Institutions (CDFIs), Microlenders, and Small Business Lending Companies (SBLCs), that have startup-friendly eligibility requirements.

Learn to read and understand basic financial statements. The income statement, balance sheet, and cash flow statement each tell a different part of the story about a company’s financial health. Together, they can be used to uncover a company’s weaknesses and strengths. Lenders use indicators from different sections of the financial statements to provide clues as to where a business owner needs to take corrective action before the situation becomes alarming.

Cash flow is the lifeblood of a business. A business can be profitable on paper but fail due to lack of cash flow. Important aspects of cash flow include payment and receivable terms, inventory turnover, fixed expense charges, and variable costs. Without a solid foundational understanding of these areas, a business owner is limited in managing the overall financial health of the business.

President Biden’s economic boom is real, and entrepreneurs across the country are starting businesses at record rates, hiring American workers, and strengthening our communities. Now is the right time to start a new small business, but setting the right financial expectations can mean the difference between a failed opportunity and a successful lifelong adventure.

For more information about starting a small business, visit www.sba.gov.

Aikta Marcoulier serves as the SBA Regional Administrator in Denver. She oversees the agency’s programs and services in Colorado, Montana, Utah, North Dakota, South Dakota, and Wyoming.