Thinking About a Bank Loan to Finance Growth? Read this.

Most companies want to grow. And they want to grow faster. But “whether they do will be heavily influenced by their ability to finance that growth – either through earning or outside sources.”[1]

Craig Everett, director of the Pepperdine Private Capital Markets Project, shared that “nearly 89% of business owners report having the enthusiasm to execute growth strategies, yet just 46% report having the necessary financial resources to successfully execute growth strategies.”[2]

The main reasons why business loans get rejected are the business’s quality of earnings and cash flow. Secondary reasons include insufficient collateral and debt load.

But why does quality of earnings affect a bank’s decision? Quality of earnings is a result of clean and accurate financial statements and not accounting techniques for tax purposes.  A company’s earnings need to reflect your business’s operating performance.  

The top reasons for declined loans are outlined by the Capital Markets Report.

To best prepare a business for financing or to reduce the need for financing, the business operating cash flow should be as strong as possible. One metric for measuring and improving cash flow is the Cash Conversion Cycle, which you can read about here.

As always, don’t borrow money, if you can adequately fund growth internally. Too many businesses have failed because of a poor borrowing strategy.  

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[1] http://www.forbes.com/sites/sageworks/2014/03/10/why-business-loans-get-rejected/?elq=~~eloqua..type--emailfield..syntax--recipientid~~&elqCampaignId=~~eloqua..type--campaign..campaignid--0..fieldname--id~~&utm_campaign=DP.Blog.2014-03-10.MMO&utm_medium=email&utm_source=Eloqua

[2] Ibid