Tips for small business owners struggling amidst the credit crisis

This article is from special guest contributor Steve Sildon, Senior Editor for, where he provides tips and advice for business owners on the strategic use of short-term debt and credit cards for small business financing.

The nation is waiting with bated breath for the proposed bailout assistance and economic stimulus package promised by the new incoming administration. Many small businesses simply cannot afford to wait. Not only are American families struggling to get by each day, small and large businesses alike are struggling mightily to stay afloat with a lingering recession and the most precipitous drop in consumer demand since the Great Depression. In the past, business owners have relied on their lines of credit to help bridge the occasional gap in their short term cash flows caused, for example, by seasonal fluctuations. But these days, small business owners who lack adequate credit histories or have not yet established any credit history at all simply cannot gain access to credit at all. In a more disturbing trend, many well-established, profitable companies with excellent, long-term credit histories have found their credit lines reduced considerably, and in some cases, cut off entirely.

Since the credit crisis began in 2008, lending requirements have continued to get much more stringent and, depending on the industry in which a business operates, lenders will not extend any credit at all. Those working in the housing or entertainment industries, for instance, may find it extremely hard to get credit without having an impeccable credit history. Many banks and credit card issuers have shuttered established business credit card accounts and stopped issuing small business credit cards almost entirely, effectively shutting down a historically reliable source of financing for small businesses. While a few are still offering a very limited selection of small business credit card products, most card issuers are only offering credit lines that are a tiny fraction of what they have been in the past. In a survey of over 300 small business owners, more than one third of those surveyed have had significant difficulty accessing credit despite government intervention. According to Federal Reserve Governor Frederic Mishkin, who testified this year for the U.S. Senate Committee on Small Business & Entrepreneurship, lending has drastically “tightened for the vast majority of small businesses” in the US in 2008.

Small businesses tend to rely on their lines of credit for a variety of different reasons. For many, lines of credit are what supports and supplements day to day operations of the company. Other businesses will need access to credit in order to purchase necessities such as supplies, equipment, computers, and other important items essential to operations. Typically, credit lines for small businesses with 5 employees or less are between $50,000 -$100,000. While day-to-day purchases typically are not large expenditures, it is important that access to such credit be available for newly created small businesses, but especially for ongoing, profitable concerns.
If you are a small business owner with a good credit history and have already established a relationship with a local bank, you should be able to qualify for a loan or a small line of credit. Be prepared, however, to present significantly more documentation and background information than you may have in the past about your company’s financial wherewithal. Even with strong, well-established credit histories some businesses will struggle to secure capital from traditional banking and lending institutions and may need to investigate alternative sources of financing such as commercial finance companies or venture capital firms.
Finding a bank or a creditor that is willing to provide credit on reasonable terms is no easy bet nowadays, but having a solid relationship with a bank can make a huge difference in your ability to get financing. If you have not yet established a relationship with a local bank, start today by calling several of your local banks and arrange to meet with one of their loan officers. The most important thing to remember is to be prepared ahead of time when approaching lenders about your financing needs. There standards are going to be noticeably more stringent now than in the past so you need to be adequately prepared prior to any meeting with a loan officer
One of the single, most important items that you will need to prepare for your meeting with banking representatives is a well thought-out business proposal that clearly states the purpose of your lending needs, how the money will be used and, most importantly, how you plan to pay it back.

Here is an outline of the 9 things that you will need in your business proposal before you approach any prospective lender:

  1. Business Description: The business description should briefly outline the business type, the products or services that you’ll be marketing as well as the customers that you intend to target.
  2. Personal Profile: Your personal profile should outline the background and relevant experience of each of the principle owners that will be responsible for repayment of the loan.
  3. Type of Loan: You should specify the type of loan that you are requesting as well as a brief description of its purpose.
  4. Business Plan: At the centerpiece of your proposal should be a business plan that outlines your strategy as well as the strengths, weaknesses, opportunities and threats to your business. Your business plan should include sales forecasts and cash flow projections for the next 3-5 years.
  5. Repayment Plan: You should also include a loan repayment schedule that will outline how you specifically are proposing to repay the loan. To be safe, you should also include a contingency plan for repayment if your sales and profit forecasts somehow fall short of your projections that will be adequate enough to comfortably meet your repayment obligations.
  6. Supporting Documentation: You should include copies of pertinent documents specific to the business that will help verify the business entity such as your articles of incorporation or partnership agreement. Be sure to also include copies of any important contracts specific to the business, such as lease agreements or substantial contracts with outside vendors.
  7. Collateral: You should include business and/or personal assets that you can use to secure funding of the loan. Collateral will help to reassure the lender that you have “skin in the game” and you will be less likely to default on the loan should you experience some financial disruption in your business. Collateral might include things such as real estate, equipment, inventory or accounts receivable.
  8. Financial Statements: If you are already an established business, you’ll need to have both business as well as personal financial statements for the last 3 to 5 years that include
    1. Balance Sheet
    2. Profit-and-Loss Statement
    3. Tax Returns (both personal and business)
  9. Your balance sheet should outline all of your assets, liabilities and any owner’s equity and the profit-and-loss statement should show corresponding revenue, expenses and profits. The prospective lender will use all of the information provided to calculate a “debt-to-worth” ratio that will indicate how much money the lender can safely lend while staying safely within his predetermined lending guidelines. You should provide copies of both your personal and business tax returns as well and some lenders may require you to provide several credit references. In addition to providing all of your financial documentation, you should be fully prepared to answer any and all questions that the lender might have about them.

  10. Personal Guarantees: Most lenders will require a personal guarantee, even for established businesses, of the owners or other principals, holding each personally responsible for the loan repayment. Depending on your circumstances, the lender may require another party’s guarantee or co-signature, particularly if the majority of your assets are jointly owned with a spouse or someone else.

Securing credit in today’s business climate is especially difficult but can still be done. With easy short-term financing solutions like business credit cards no longer a viable option, traditional banking and lending institutions just might be one of your only available options. But before you approach any lender, be sure to be prepared, do your homework and gather all of the documentation outlined here ahead of time. Your preparation will serve you well in this new lending environment.

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