By Rieva Lesonsky
At some point in their growth trajectories, many small businesses need an infusion of cash. There are various ways to attain capital, but one of the most popular is applying for a small business loan.
To guide you through the ins and outs of applying for a small business loan, and avoiding common mistakes Small Biz Daily talked to Iskender Eguz, Head of Small Business Lending and Decision Sciences at Capital One.
Small Biz Daily: What are the most common mistakes small business owners make when applying for a small business loan? What are the best ways to avoid them?
Iskender Eguz: A common mistake we see is business owners not partnering with their bankers. It’s important to openly discuss your plans, opportunities and risks you see so they can help you structure what product or products would best meet your needs.
A lot of business owners either under- or overestimate how much borrowing they will need. Business owners might need a mix of term loans for investment, as well as lines of credit that support their ongoing growth. Sometimes, SBA loans might be the right answer, giving customers extended terms they need that they might not otherwise qualify for. Having an open dialogue about where the company is going can help you understand what makes the most sense for your business.
Small Biz Daily: What role do business credit reports play in positioning an SBO for the best loan/financial terms?
Eguz: Your business’s track record in meeting its past obligations is an important consideration for lenders and business credit reports are a useful source of information regarding that. Banks are increasingly using them as a tool for making lending decisions, or at least as an input to their assessment of the 5Cs of credit that they consider in their decisions.
Small business owners should strive to always maintain a good track record in their business and personal credit history, using borrowing wisely without overextending themselves and reliably making their loan payments.
Small Biz Daily: What are the 5 C’s of Credit, how do they work, and how do they impact a small business owner’s SBO’s prospects for a good loan?
Eguz: The 5 C’s of Credit is a common lending framework lenders typically use to evaluate businesses. The 5 C’s are: Capacity, Capital, Collateral, Conditions, Character.
The underlying business or the business plan should have the Capacity to generate enough cash flow to pay back its debt obligations, while absorbing unexpected expenses or changing Conditions in the economy or industry.
The Character, or who the small business owner is, is critical. Not only whether you have the expertise to be successful in your business, but also your personal credit history demonstrating evidence of meeting prior debt obligations is important.
Finally, how much personal investment or money you are putting in your business (Capital), and whether you would offer anything as security for the loan (Collateral) shows your commitment to the business and can influence your ability to get approved.
Small Biz Daily: You got a great loan, now what? What are the best ways to manage your funds for maximum growth?
Eguz: Plan ahead. Effective cash flow management is key for running a company successfully, with or without additional borrowing. If you are entering a growth phase, then take the time to understand what you are going to need to support your business now and down the road. It’s important to realize that any cash flow challenges aren’t going to be fixed overnight with a loan.
Small business owners can help ensure positive cash flow by understanding how much money is coming in and out every month, ensuring prompt payment from customers and vendors, paying bills on time, planning for the financial future, watching inventory and various other factors. Building a savings cushion can also help you prepare for unexpected expenses or future grow.
Additionally, having a good relationship with your banker or accountant goes a long way in keeping your business financially fit. For example, Capital One’s business bankers help customers evaluate their cash flows to identify any potential issues or opportunities to improve. We also help our customers effectively utilize excess cash to invest and maximize returns to avoid missed opportunities and really fuel business growth.
Small Biz Daily: At what point do lenders stop looking at your personal credit report when you’re looking for a business loan?
Eguz: As I said, Character, or who the small business owner is, is one of the key elements of the 5 C’s of credit framework banks use to evaluate lending decisions. Not only whether you have the expertise to be successful in your business, but also your personal credit history demonstrating evidence of meeting prior debt obligations is important; and personal credit report is the typical information source used for that assessment. Loan decisions in the small business space will typically include an assessment of the personal credit report of owners and guarantors.
About Iskender Eguz: In addition to being the head of small business lending and small business bank decision sciences at Capital One, Eguz has more than 15 years of experience and deep expertise in advanced analytics, strategy development, valuations, marketing and credit risk management.