Don’t compromise on capital when applying for a loan
More available cash and assets means fewer barriers to securing a commercial business loan.
When applying for a commercial loan, your business’ capital might be the first thing that springs to mind.
Capital is the readily available money and savings, plus investments, properties, and other assets that can be quickly accessed for immediate funds. It takes into account how much debt your business has compared to its available funds.
As a general rule of thumb, coming into a loan discussion with ample capital indicates a more profitable business – one less likely to default on any debts.
If you think of your business as a body, capital is the blood flowing through its veins. Steady blood flow means a healthier body, just as steady cash flow provides more loan security.
Show, don’t tell with business capital.
While having consistent capital flow is important coming into a loan discussion with a bank, it’s even more important to be able to clearly demonstrate that flow.
All reported earnings should align and your business’ balance sheets must add up, proving there is a solid foundation of capital in the event of an unexpected challenge.
To help with this, businesses can diversify their capital investments. Making sure your business is financially secure across the board is always a good sign for banks.
But even if your capital is strong, the loan amount a bank can approve for your business is limited if your balance sheets don’t line up or your numbers are hard to prove.
Demonstrable capital flow is a win-win. It helps businesses secure loans because it reduces the risk for banks.
How can you boost your business’ capital?
Raising capital isn’t always a solo effort. There are a number of different methods to improve your capital flow:
- Reinvestment is key: One of the best ways to improve your financial standing in the eyes of a bank is to reinvest money back into your business. This demonstrates a commitment to the future of your company and also serves to improve your character.
- When in doubt, diversify: In the same vein as reinvesting, spreading out the areas you direct money can help secure your capital. A business with a wide array of strong assets (investments, properties, inventory, etc) is better positioned to endure any potential setbacks.
- Look to friends and family: When possible, generate exterior capital via fundraising through friends and family. This can often ensure that capital is more abundant in the short term while your company is working to invest for the long run.
- Consider bringing on partners: In the same way working with friends and family can help ease a business’ financial burden, bringing on additional partners to the business can often open new avenues of capital flow for your business.
To ensure a healthy capital flow:
- Be sure existing capital is well-documented and demonstrable.
- Look to diversify the areas your business invests in.
- Raise capital through interior and exterior means.
- Nurture honest and consistent relationships with your bank.
Note: This is one of five blogs breaking down the Four C's and a P of credit worthiness – character, capital, capacity, collateral, and purpose.