Have you ever loaned money to a family member or friend?  How was your experience?  Did you charge interest?  Did you get paid and on time?  Would you do it again? 

Have you ever loaned money to a family member or friend?  How was your experience?  Did you charge interest?  Did you get paid and on time?  Would you do it again? 

Imagine starting a company with thousand dollars available for loans to perfect strangers.  What questions, if any, would you ask? 

When businesses approach credit acquisition, they tend towards viewing the process as an infinite money spiral.  Lenders, on the other hand, view the process with great caution.  There’s a natural tug of war between business owner borrowers and lenders.  While business owners are risk seekers, lenders avoid risk.  A business owner’s world view is bathed in optimism.  The lender anguishes on what might go awry.  While all businesses face some form of regulation, it’s difficult to match the regulatory shackles of the banking industry.   

At Alliance Advisors, we help businesses find capital when challenged by standard approaches.  Regardless of financing source, there are important preparatory steps before seeking capital.   

Has the business established a credit history via trade partners or otherwise?  Does the business have a plan?  This document not only serves as a great way to share the vision and story, it also serves as a management tool.  Is there a budget?  This financial document demonstrates the business owner has carefully considered cash flow.  An often ignored consideration is the exit plan.  What would have to occur before a business owner made the painful decision to shutter the operation?   

Any lender is going to evaluate business factors.  Ideally, the business has sufficient collateral, even though lenders never want to possess it.  The business should have a history of financial strength and sufficient cash flow.  Don’t ignore legal considerations.  How would you feel about lending money to a business that was the subject of a lawsuit?   

It’s often the case that a loan to a business is also a loan to an individual.  Lenders understand that some borrowers may attempt to seek shelter behind a corporate veil.  That’s why loan and trade contracts often have a personal guarantor.  As an individual, your credit score is your foundation.  While you may be able to obtain financing with a lower score, it will be more expensive.  Also, don’t expect the lender to assume all risk — you’ll need to have skin in the game.  Finally, being the subject of personal legal issues can also impair the ability to obtain credit. 

Business credit is all about confidence.  Plan to ensure both parties are confident.