If you are a small business owner or a real estate operator, then you may have encountered trouble securing financing at one point or another in your career. You might have approached a bank for a loan and been rejected, despite having a good company and bright prospects. Such is the plight of the entrepreneur!
Traditional lenders are typically large institutions with strict qualifications for financing. The applicant must meet certain criteria that are not negotiable. This precludes many companies and self-employed people from securing capital that they could use for growth.
In many cases, the process used by traditional lenders is seemingly unfair. For instance, a person may own a company that generates a $100,000 annual profit. However, for tax planning reasons, she elects to withdraw a salary of only $25,000. From a bank’s perspective, that amount of personal income may be too low. Or it could complicate the application process and cause delays.
For that reason, entrepreneurs often turn to non-traditional lenders. They can be more flexible, creative and can try to understand the business beyond what’s demonstrated by mere numbers. Here are some helpful ways to secure funding from a private lender.
Private financiers generally expect a business owner’s affairs to be a bit messy. It is not unusual or frowned upon. For instance, you may own a property with several partners. You might have been sued before. Or you may have stored your holdings within a family trust. It’s important to disclose all of this as soon as possible so that the lender can comprehend your business. Trying to hide complications or only disclosing them when asked can scare the lender away. Be up-front and honest about it. Your situation is probably not unique.
Each lender will have its own process for due diligence. That might include searching property records, litigation history and outstanding taxes, etc. If you are asked to provide certain documentation, don’t drag your feet. Otherwise, you might cause a delay or give a bad impression to the lender. You should demonstrate to the firm that you are professional, expedient and reliable.
Communicate your business model clearly
You should be able to explain to the lender how your company makes money. That will likely include citing profit margins, costs of customer acquisition and marketing expenditures. This might be simpler if you are in real estate, since property is generally relatively simple to understand. But regardless of your industry, you’ve got to know your numbers and be able to communicate them clearly. This is a crucial part of the lender’s due diligence.
Keep in mind that the lender is probably not an expert in your particular field. The business may seem straightforward to you, but it may not be to an outsider. You should be cognizant of that because if your revenue model cannot be comprehended, then you will likely have trouble securing financing.
Alexis Assadi is the Chief Executive Officer of Pacific Income Capital Corporation, a firm that provides financing to entrepreneurs and real estate operators. He specializes in providing growth funding in amounts lower than $250,000 to Canadian and American business owners.