I recently discovered an error in my marketing firm’s finances that cost me nearly $23,000 in taxes.
I immediately met with my accountant to discuss the problem and my current cash position, along with my goals of building my company and whether it would be better to get a loan or use cash reserves to pay the debt.
She encouraged me to find a good banker to figure out all of my options.
“Sometimes small-business owners say they need capital in order to grow, but what they really might be saying is that they need capital to keep the business running,” said Kevin Payne, vice president and senior business banker at PNC Bank in Raleigh.
Payne’s role is to help small businesses with revenue of $3 million to $10 million manage their growth and anticipate challenges.
In doing so, Payne helps business owners understand their operating cycles and utilize their balance sheet strengths.
“Confusing growing the business with running the business is risky,” he said. “Small-business owners who need money in order to keep the business running could be masking a systemic problem within the company.”
Business growth indicators include outgrowing your current space and struggling to keep up with production, equipment or service demands.
Pulling from cash reserves in order to offset a cash flow shortage is a signal to consider a business loan.
To boost your chances of being approved for a small-business loan, Payne recommends focusing on maintaining healthy cash balances and profit margins, as well as minimizing operating expenses as much as possible.
“If expenses exceed revenues, it becomes very difficult to prove how the business will be profitable in the future,” Payne said.
Sometimes, owners try to lessen their tax liability by intentionally showing less profit. This move can be detrimental to a business applying for credit.
Payne says it is critical that business owners demonstrate the ability to pay back the loan. He also encourages owners to seek the advice of a CPA or other tax professional prior to starting the loan process.
“Typically, insufficient cash flow, little or no collateral and poor credit history are root causes for loan denials,” Payne said.
Payne warns, however, that healthy cash flow, a strong balance sheet and good profits are not always enough to get your small-business loan approved.
“Good personal credit is an indicator that the business owner is responsible and has managed her/his finances favorably,” he said.
In his 14 years of banking experience, Payne says he’s seen loans that looked great on paper get denied due to a owner’s poor credit history. Credit matters.
As I continue to focus on my business growth plan, I now know exactly what to expect to lock in the loan.