First-Time Financing Advice for Small Businesses

Obtaining a commercial loan can be one of the biggest challenges facing a growing business. Even experienced small business owners can feel overwhelmed and under-prepared when seeking outside financing for the first time. The California Society of CPAs ( offers the following insights into how to borrow from a bank directly or through an SBA-guaranteed loan.


Bank loans can be a flexible source of capital for businesses, but don't underestimate the need to make a strong case. Your ability to secure a loan greatly depends on how well you present yourself and your company to prospective lenders.
Start by determining exactly how much funding and what type of financing your business needs. The most common reason for borrowing money is to purchase assets. Short-term debt, such as a line of credit, is typically used to cover the cost of short-term assets, such as current inventory. As the inventory is sold, and cash is generated, the loan is repaid. For larger needs, such as purchasing expensive equipment or property or starting a major expansion, you'll need to turn to long-term debt.


The next step is to seek out banks active in small business financing. Look for lenders that routinely make the size of loan you need and who have some familiarity with your industry and geographical area. Assuming your current bank fits that criteria, it's a good idea to start where you already have an established banking relationship.


It is impossible to over emphasize the importance of a solid, up-to-date business plan. When you apply for a loan, you will need to provide prospective lenders with a business plan that includes detailed information about yourself and your company. Your plan should include an executive summary, a description of the company, a market analysis, an overview of your operations, a marketing plan, a description of your management team and staff, and financial statements and projections. Prepare for the meeting by reviewing your plan and financial statements with your CPA and by anticipating the questions that will come up.


In evaluating your loan request, the lender will examine what is commonly referred to as the "five Cs" of credit worthiness - character, capacity, capital, collateral and conditions. Be prepared to make a case for meeting each one. Of these criteria, your character is probably the most important, but your capacity to manage the business successfully and generate the cash that will repay the loan is critical as well. Capital, the money you personally have invested in the business, is an important indicator of your own confidence in the business, while collateral, the property you are asked to pledge, is a secondary source of repayment that protects the lender's interest. Conditions focus on the economic climate and environmental influences on the business and are often beyond the borrower's control.


In addition to the five C's, a prospective lender will look at the financial statements you provide within your business plan. The lender will likely want to see personal financial statements for you and each partner or stockholder owning a substantial percentage of the business; a balance sheet that shows what the company owns and owes; a profit and loss or income statement; and cash flow statements. It's a good idea to work with a CPA to create these statements.


The Small Business Administration (SBA) is a federal agency that provides management and financial assistance to small businesses. In most cases, the SBA does not grant direct loans, but works in conjunction with banks to guarantee a variety of loans for small businesses. If a bank turns down your loan request, ask about the possibility of an SBA loan guarantee. Under the SBA loan guarantee program, proceeds may be used for a variety of purposes including inventory acquisition, machinery/equipment, working capital and debt restructuring.


Banks want to lend money to credit-worthy businesses. To demonstrate that you and your business are a good credit risk, consult with a CPA who specializes in small businesses. He or she can provide valuable advice about how to present key financial and business information accurately and competently.