The warmer months often bring our picturesque visions of small businesses into focus — local florists adorn their stores with colorful bouquets, mom-and-pop ice cream shops serve lines out the door, and our favorite restaurants bustle with the day’s fresh catch and seasonal specialties under a clear sky.
While daydreaming of these early summer scenes, it’s important to remain cognizant of the economic headwinds that have impaired small businesses over the past year. Though entrepreneurs are used to rising above a difficult economy, challenges persist.
Although inflation rates have cooled significantly over the last year, prices are still causing problems for consumers. Supply chain and labor issues linger, and concerns around a potential recession and commodities prices remain at the top of many people’s minds.
Despite these concerns, Bank of America’s 2023 Small Business Owner Report found that nearly half of entrepreneurs plan to grow their businesses in the coming year.
Related: 3 Ways to Start Raising Capital for Your Business, Big or Small
The importance of capital
One of the most critical components for business growth is access to capital. Consistent and convenient credit empowers business owners to expand the scale of their operations, diversify their revenue streams, acquire new tools and technology and provide a buffer against economic downturns.
For many business owners, a key source of capital infusion is a bank loan. The process of applying for and receiving loans can feel complex, even mystifying, but understanding the keys to the application and approval process can provide clarity and help business owners prep for success.
Most lenders consider a few primary factors when evaluating a loan application: Capacity, capital, conditions, character and collateral.
Lenders want to ensure the borrower has the ability to repay their business loan. This is often calculated by evaluating a business’ debt-to-income ratio. A capacity evaluation is essentially a risk assessment on the part of a lender — they want to ensure you have the cash flow to take on loan payments.
To secure a loan, entrepreneurs will likely have to show they can commit their own funds toward business costs. Prospective lenders are looking for a personal investment in your business endeavors, including equipment and savings to support your business. Think of it like a down payment that shows you’re committed to the project.
Some external factors are also considered in your loan application, including the economy, industry trends and any pending legislation related to your business.
Your personal history also plays a role in a credit application. Some considerations of character might include industry experience, work history and personal credit history. Many lenders believe that past behavior is the best predictor for the future, and it’s crucial for business owners to repay any outstanding loans and monitor the behavior of those closely associated with their businesses.
Some lenders will want the assurance of additional assets as security for potential loan repayment. Inventory, cash and real estate can all qualify as collateral, as will secured loans and credit cards.
Related: 5 Things Entrepreneurs Need to Know When Raising Capital
Other avenues for access to capital
Sometimes, business owners will struggle for approval even if they meet the previously mentioned criteria and are otherwise in good financial standing. Luckily, there are options beyond traditional loans to secure capital, such as grants and community development financial institutions (CDFIs).
There are thousands of federal grants that business owners can apply for, and many states and local organizations also offer specific grants for entrepreneurs. Additionally, CDFIs are lenders with a mission to provide fair, responsible financing to underserved entrepreneurs.
The small business lending space can feel overwhelming, and staying up to date on the latest programs and resources available to business owners is crucial — and not always easy.
Many entrepreneurs are interested in greater educational resources around small business finances. Over the past few years, these resources have continuously improved and evolved.
The U.S. Small Business Administration (SBA) offers a learning platform for small business owners, including educational and training programs. SCORE also provides educational resources across the business lifecycle, as does Bank of America’s Small Business Resources site. In addition, the Bank of America Access to Capital Directory can serve as a crucial resource for business owners looking to identify sources of capital.
The capital landscape and approval process can feel overwhelming at times, but by staying prepared, exploring all available options and keeping up with the latest business trends, entrepreneurs can focus less on the ins and outs of finance and more on serving their customers all summer long.
Related: How to Get Funding: The Dos and Don’ts of Raising Capital
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