Finding the capital for a new business or business expansion is often the most difficult job an entrepreneur will undertake. It is time consuming, stressful, and often frustrating; but a little planning and preparation beforehand will save you lots of aggravation and disappointment. Like any business partnership, which is what obtaining financing is, the partners want to be assured you have researched your options and know exactly what you need before coming to them for assistance.

The common perception is that small business owners have a difficult time borrowing money.  While this is not necessarily true, what is true is that; what the businesses that fail to secure loans have in common is not their size but their unpreparedness. The fact is that banks make money by lending money. If, however, you request a loan when you are not properly prepared, you send a the signal to the lender that says in neon flashing lights, "High Risk!"

Being prepared means knowing exactly how much money you need, why you need it, how you will pay it back, and, most importantly, what lending institutions are looking for when they approve loans. Lenders want to make loans, that's how they make money, but they must make loans they know will be repaid.  The criteria loan officers use to judge loan applications are commonly referred to as the five C's of Credit.

Character - Lenders will order a copy of your credit report and look at debt repayment trends.  They want to know simply if you pay your bills and if you pay them on time.  If there are blemishes on your report, be upfront and explain them before the lender discovers the information himself.
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Cash Flow- Lenders will look at historical and projected cash flow statements to determine whether you will be able to repay the loan and still have money to adequately run the business.  Make sure your projections have sufficient, documented justifications and outline any and all assumptions used when preparing the cash flow statements.
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Collateral- Collateral is an asset (something you own), which a lender may claim to satisfy a loan in the event the loan is not repaid according to the required terms.  Many times the assets purchased with the loan money serve as collateral but if the business does not have enough collateral or the money is being used for a non-asset purchase, the bank will look to personal assets.
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Capitalization- Capitalization refers to the basic resources of the company including owner's equity, retained earnings, and fixed assets.  Coverage ratios and debt to equity ratios are important factors for lenders but you do not have to be fully capitalized to qualify for a loan. You do have to prove your current capital is being used efficiently and justify why you need this loan.
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Conditions- These are factors that affect the success of the company but are external to the business. The lender will assess the industry, market, and environmental conditions to satisfy the institution that you have considered all possible threats as well as opportunities that will impact your business and its ability to repay the loan. Examples of conditions include government regulation, competition, and industry trends.
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Be prepared when applying for a loan, take time to talk to your banker about your financial needs, and establish a relationship. Each bank has different requirements and time frames and with a little planning you will find the one that fits best with your business needs.