Small Business Borrowing - Preparation Tips
The Win-Won Business Mindset (#2): “4 Ways Small Businesses Can Prepare for Borrowing”
If you’re planning to approach a financial institution to borrow, be prepared. Here are four basic guidelines and discussion points to consider.
1) “Character” Matters
Win-Won Business Consulting believes the most important of the “5 Cs of credit” is character. Lenders want to work with people they can trust and collaborate with effectively. When trust is established, they’re more likely to go the extra mile to achieve a successful outcome.
Even if your business lacks creditworthiness and isn’t approved immediately, a good lender may still offer some guidance on how to improve your financial position. Respecting the process and building a strong relationship with your lender fosters goodwill—ideally transforming a standard financial transaction into a positive experience.
Conversely, nothing can derail a deal or relationship faster than poor character. Remember, obtaining credit should be viewed as a privilege, not a right.
TIP: Respect goes a long way. Gain the lender’s confidence by demonstrating good character.
2) Why Are You Borrowing?
It may seem like a simple question, but sometimes businesses aren’t fully prepared to answer clearly. Requesting money naturally prompts the question, “What is the money for?”. The lender needs clear information to ensure that the right debt instruments and amounts are used, and the deal is properly structured.
Lenders will most certainly have to go through a credit (risk management) process. Generally, the more credit being requested, the more robust and comprehensive the process becomes. Consider the nature of your borrowing:
- Are you purchasing specific assets to expand operations?
- Are you requesting an operating line of credit to manage working capital?
- Are you refinancing or restructuring?
TIP: Be clear and specific about the purpose of the borrowing.
3) Have Your Finances in Order
Numbers are the language of finance, and your financial data is a key determinant in evaluation. Financial statements provide insight into the health of the business and help assess appropriate debt levels.
TIP: Have your financial statements prepared and up-to-date, and be ready to discuss numbers.
4) Prepare to Discuss Requirements and Costs
Transparency is key to building trust—and it’s essential for responsible borrowing. Be sure to ask the lender questions about their process and requirements. Here are a few up important questions to consider:
- What documentation will be required?
- Will collateral or security be needed?
- What type of standard covenants will apply?
- What are the expected costs and fees?
Gathering information up front could save you a lot of time, energy, and possibly money down the road. It also enables you to make more informed decisions and supports comparative analysis.
TIP: Familiarize yourself with the financial institution’s products and services, and prepare questions in advance.
Preparations to borrow should start before initiating conversations with lenders. The lending process can be complex and time-consuming, however, having these points addressed ahead of time will ensure you start off on the right foot and may help you negotiate. And yes, being prepared is a sign of good character.
Before signing any contract or agreement, consult with qualified legal counsel to ensure you fully understand your legal obligations, rights, responsibilities, and potential liabilities.
“The Win-Won Business Mindset” is a series by Win-Won Business Consulting designed to share insights, ideas, and strategies for small businesses and entrepreneurs.