Starting Your Business
As you start your business, many will focus on the initial resources to start the business, continue the business, and then grow the business. An entrepreneur addresses a multitude of items to start their business, any of them can tell you, time and resources are limited. The impact is, some aspects of growing the business may be overlooked.
When the time comes to obtain financing, , for your business, whether it be equipment, real estate, or a line of credit many owners will not take into consideration that not only do you need to have the business finances in order but the personal finances as well.
Most lenders will look to the business finances for the cash flow to support the new debt being requested. After the lender has determined that the business has the cash flow to support the request, they will look to the business owners to ensure they have the liquidity to step in, if the business is ever unable meet its obligations. Over the years I had to decline requests not so much because of the business but because of the individual. The individual, if strong enough, can push an application across the finish line from decline to approval, it is less likely the reverse will occur. An approval is rare with an individual that is not strong. In my time as a lender, I have had to revoke lines of credit because we lost a strong member of ownership. We approved the line of credit because of the strong individual, underwriting determined the business did not fully support the request. I also have had a start up restaurant approved because of the strength ad experience of the individual. An example of how a strong individual can support and otherwise weak request.
As with business finances, an individual cannot correct personal finances overnight. It takes years to build up liquidity and pay down personal debt. Cash is king when it comes to credit, the lower your personal debt to income and the large your cash liquidity, the better your odds. A note regarding liquidity, as you look at your own financial situation. Retirement accounts typically will not count towards your liquidity. We all acknowledge that retirement accounts have great importance, but lenders will not always take them into consideration when looking at your liquidity. They want to see cash that is easily accessible, without tax implications and penalties.
As you are growing your business, be mindful of your personal finances. Your ability to obtain credit hinges not just on the cash flow of the business but the stability of your own personal finances.
David Coletta has 15 years in the banking industry and most recently has worked with businesses earning between $5-$50M a year in revenue. If you are looking to learn more please reach out.