By Deborah Jeanne Sergeant
The percent of small businesses applying for loans, liens or lines of credit to cover working capital increased from 54% in 2023 to 63% in 2024, according to Small Business Finance Insights, a specialty website that provides insights and resources for small business lenders.
Obtaining sufficient working capital provides small businesses with “breathing space” as they work to improve the business and expand the company’s cashflow.
Lack of capital represents the top reason new businesses fail. Without cashflow, small businesses are likely to join the more than 20% of businesses that fail within the first year, according to the Bureau of Labor Statistics. The Bureau further states that two-thirds of private companies founded in 2013 were no longer in business in 2023.
Obtaining a loan as a small business relies upon understanding on how banks evaluate the applicant.
“Strong personal and business credit histories are essential, as they reflect financial responsibility,” said NBT Jonathan Spilka business banking territory manager.
When banks lend money, they take a risk that it may not be repaid. A solid credit history means that the company owner and applicant and also the business itself are low-risk and likely to repay the loan. This information is closely aligned with “a business’s ability to repay the loan, specifically, whether it generates enough cashflow after expenses to cover debt payments,” Spilka said.
The bank needs to know the business can make those loan payments. Is there demand for the business’s service or product? Is the market already saturated with the same service or product? Does the company’s history demonstrate growth in demand that’s projected to continue? Loan applicants need to show numbers that prove their assertions of demand and growth, as banking is a highly objective industry.
Dig into statistics from industry organizations, local business organizations and your own sales records. Providing pie-in-the-sky projections will not prove as helpful.
Although numbers are evidence, some “soft” evidence of loan worthiness can also help.
“Experience can be a factor, too,” Spilka said. “Businesses with a longer track record and seasoned owners are often viewed as more resilient, especially during economic cycles. While newer businesses may face more scrutiny, there are programs available to support them.”
If yours is a small business that has been around awhile and your would-be lender has heard of you, that familiarity makes a difference. The banker will realize that you’re in it for the long haul and will do what it takes to succeed—and repay your loan.
Even if you don’t need a business loan right now, building a relationship with a banker may prove helpful in the future. Lenders don’t mind if you come in to introduce yourself, ask some questions about their bank’s financial products and see what could help your company. Getting to know a lender can help the banker understand your company and industry. This may help both of you as the lender may suggest banking tools that can aid in growing your company, whether through a business loan or another method.
Spilka said that “building a relationship with your bank early on can make a big difference. A trusted banking partner can guide you through the process and support your growth over time.”
