Even as the economy shows subtle signs of a future recovery, many economic experts agree that it is far from over and that spells bad news for small businesses in search of financing. Lenders continue to be tight-fisted when it comes to extending credit, and this dearth of financing has dealt a tremendous blow to many small businesses in desperate need of funding as the recession drags along.
In such an environment it is important to be aware of what lenders are looking at when they receive a loan request. The following are ten signs that will alert small business lenders to the idea that their may be a serious problem with the business and possibly cause them to reject a loan request. While many of these signs may seem obvious, others may not. So take note. If any of these situations apply to your business then be prepared to have an explanation available for the loan officer.
1. There is a significant drop in sales. Though many businesses (especially those involved in retail) are experiencing a decrease in sales traffic, a sudden drop in sales could be a sign that your business is out of touch with consumer demand or is losing its market share.
2. The business is unable to pay off bills on time. A sudden inability to cover expenses could be the result of lower sales due to the recession and an increase in the cost of materials and supplies; or it could be a sign of poor cash flow management
3. There is a sudden increase in personal expense write-offs. Though claiming personal expenses can be for legitimate reasons, a sudden or disproportional increase in personal expense write-offs can be a sign of fraudulent activity.
4. Insufficient funds are leaving the business. The owner may be trying to cut costs, preserve cash flow, or prepare for later expansion, but it can also be a signal that anticipated financial trouble looms ahead.
5. Critical equipment is being sold. Under-utilized or outdated equipment may be sold to increase cash flow. It could be the intention of the business owner to replace this equipment with newer technology. But lenders may see this as a desperate attempt to bring money into the business.
6. The business has a significant increase in debt. Though the increase in debt may be necessary to cover a temporary cash short fall, or it may be the prelude to an expansion, it can be a sign to the lender that the business is starting to flounder.
7. Cash reserves are plummeting. Like the situations above, this could be a sign that the business is headed for financial trouble.
8. The operating cycle is increasing. A business’ operating cycle is the average time between acquiring raw materials or inventory and receiving payment for the goods/services provided to customers. Business owners need to pay attention to their cash flow, inventory flow, payables and receivables. If the cycle has started increasing then be prepared to offer an explanation.
9. There has been a significant increase in legal fees. Perhaps a business owner needs the assistance of a qualified CPA or attorney to provide counsel on a range of issues, such as taxes, business structure, acquisitions, or intellectual property protection. But it could also mean that a lawsuit is brewing.
10. A change in ownership. A recent change in ownership can also put off lenders. They may want to know if the new owners have management experience.
In short, to secure the decreasing pool of small business financing, business owners will need to start thinking like a lender. By spotting potential problems before hand, you can increase your chances of getting approved for that loan.