Accessing funding is easier when owners plan ahead. President and CEO of the National Association of the Self-Employed (NASE), Keith Hall, explains how relationships, credit, and organization improve loan readiness.
Keith Hall
President and CEO, National Association of the Self-Employed (NASE)
What steps can small business owners take to improve their chances of getting loans?
I think the most important thing is to start building a relationship as early as possible. Typically, small business owners wait until they need capital, until they need to make a loan to get new equipment or whatever. When you walk into a bank with a needy look on your face, it’s more difficult to convince them to go out on that limb with you and lend the money. So, as soon as you start your business, it’s my advice to sit down with your banker.
Community banks seem to work better for the smallest of small businesses. Big banks certainly do a great job, but developing a relationship with a personal banker that lives in your community, that understands your community, and that knows what forces are at work in that particular community is invaluable. Share with them your plan, your financial projections, and your bank account. Even if they can understand a little more about your business from the beginning, then when you do need additional capital for growth, you have someone to go to, someone who already understands your business. Developing a relationship early on, as early as possible, is the best first step.
How can building strong credit help small businesses access capital better?
Certainly, when you go to a community banker or even when you go to investment advisors, one of the first things they’re going to do is check up on you. Included in that is doing a credit search. They’re going to see what your credit score is, and if they can see that you have a commitment to making payments, they’re going to get a picture of how you manage your business.
Maintain a good credit score, do whatever you can to adjust that score higher, and make sure you pay your bills on time. Sometimes we take for granted all those easy and simple things, but if you can commit to maintaining that credit score, then that’s going to be one closer step to securing a loan when you need it.
What role do credit cards play in helping small businesses manage cash flow?
Unfortunately, credit cards are a very expensive form of lending. Typically, interest rates on credit cards are more dramatic than traditional lending opportunities. However, the fact of the matter is that a majority of small business owners do indeed finance their business with a credit card.
Managing payments, managing cash flow, all those things are important. Meeting payroll every Friday or every other Friday, all those things come into play in meeting cash management. If you have access to capital through a local bank, typically that’s less expensive than credit cards. If you don’t have that relationship, maintaining that good credit score, maintaining a payment history on specific credit cards, and potentially increasing the limits on those credit cards can be beneficial in managing cash flow. But again, that’s a dangerous place to go. Once credit card debt rises, that interest expense can kick in, which has a worse effect on current cash flow because you still have to meet those payments.
How can insurance coverage support small businesses in securing capital?
Insurance is important. Most small business owners don’t have the luxury of borrowing just on the name of the business. That local community banker is going to ask for a personal guarantee. So, having insurance — not just for your health or your life, but insurance on the business — is critical. Small business owners are typically the major asset for their small businesses. If they are incapacitated or if they’re in the hospital for a couple of days, nobody is going to be taking care of the business. Having an accident policy or a disability policy that can cover some of those short-term cash flow issues is important. That can be critical to communicate to your lender.
The small business owner is everything. They’re the CEO, the CFO, the CIO, the CMO. They do everything. If they’re out of commission for a week, the business is in trouble.
Beyond traditional loans and what we’ve discussed, what other options or strategies should small business owners explore to increase access to funding?
Maintaining a good business plan, maintaining control over your business, having good financial statements, and having good record keeping — all of those things make the business look neat and orderly. If your business is organized, if it’s neat, and if you maintain control, then you’re going to give that air of a business that is on the path to success.
I think a lot of small business owners also look to other family members or friends for financing. They have personal loans. All those things can be very difficult, because borrowing money from family doesn’t always work out great. The better you control your business, the easier those types of relationships are going to be to manage.
Whether you’re looking at traditional lending, using your credit cards, or borrowing from family and friends, there are certainly options. NASE has a benefit through a firm called Connect Lending, which can connect small business owners to thousands of lenders all across the country.
Recognizing that you’re not alone is a critical message to send to small business owners, particularly new small business owners. The IRS has a great website. The Small Business Administration has lending opportunities that can be helpful. If you have an Internet connection, you have organizations like ours at NASE.org.
