How Small Businesses Can Become More Bankable & Evaluate Funding Options

Q&A with Bryan Doxford of EGF

In today’s Small Business Q&A, CoverWallet spoke with Bryan Doxford, Senior Vice President and Program Manager of Community Lending at Excelsior Growth Fund (EGF), an affiliate of New York Business Development Corporation (NYBDC), to discuss key steps small businesses can take to become more bankable.

There are lots of alternative financing options that small business owners can access if they know they don’t qualify for a bank loan or if they get denied from one. However, these options usually come from non-profit organizations that have limited capital to spend on marketing and get their name out there. Although reaching these organizations is often necessary to get the first round of capital, Doxford shared with us some tips on what small business owners can do to make their business more likely to qualify for a bank loan – which is the last step in the “continuum of capital” ladder that EGF helps businesses climb.

Common Problems in Small Businesses Seeking Loans

One of the most common problems that Doxford sees in small businesses is that they don’t know if their business is healthy or not. He explains that small business owners generally know if they are healthy as humans, since they can easily tell by their doctor appointments, weight, cholesterol levels, sugar intake, etc. However, he says that, more often than not, small business owners don’t have a benchmark for their business and are not routinely sitting down to look at their business and analyze how it is doing.

In Doxford’s opinion, the only way to be able to properly diagnose a business and know how it’s doing is to know the numbers. Although this might seem intuitive, he says that some small business owners are good at delivering a story or providing a product but don’t have a good understanding of their numbers, which means they “can’t really create a dashboard, so they have no real notion of the viability of their business.” He explains that some business owners feel like “everything is great” and have a lot of enthusiasm and excitement, but they overlook their financials which ultimately may show that their business is weak.

What to Do Before Seeking Capital

Community Development Financial Institutions (CDFIs) can be helpful in not only getting access to capital but also in helping your business get set up for when it’s time for financing. One of the things that EGF teaches entrepreneurs is the set of metrics that banks utilize to make credit decisions when lending to small businesses, which Doxford describes as an “aha moment” for them since learning how they are going to be judged provides a great deal of empowerment.

Doxford explains that going to EGF is like a doctor’s appointment – a small business owner comes, then EGF assesses their needs and tries to come up with solutions. A recurring problem he sees is that sometimes people diagnose their own companies incorrectly or insufficiently. He uses the example of someone that goes to see a doctor for knee pain, but the doctor might find out that it’s also the lower back that is part of the problem that needs to be treated. So, a small business owner might think the business needs help with marketing, but CDFIs like EGF can help assess the problem and decide that the business needs assistance with marketing plus something else to really increase growth.

Tips on How to Make Your Business More Bankable

The main thing that Doxford thinks small business owners should focus on to make their businesses more bankable is numbers. Entrepreneurs should place a lot of attention on their financials and make sure they understand their numbers, since they will help make the strongest case for their business. Another thing that lenders ask for that surprises a lot of small business owners is a business plan. Doxford explains that entrepreneurs often “overlook the fact that their business plan is a living and breathing document.” He says that “business owners spend so much time working in their business, they oftentimes overlook the obvious which is to work on their business, and having a business plan really lifts that.”

Having a detailed business plan is a good way for small business owners to be able to “execute on the vision that they have for their company and it provides a nice checklist of things they plan on accomplishing.” Doxford suggests writing down short-term goals as well as long-term goals to be able to share with lenders to make their case more compelling.

Another helpful tip is to look for CDFIs, since their mission is to help small businesses grow. According to Doxford, there are lots of alternative financing options, but they are the “best kept secret.” Doxford suggests reaching out to banks and small business development centers around the country to get contacts for alternative lenders like EGF. CDFIs can help businesses achieve growth by providing capital as well as educational resources.

Making Sure You’re Getting the Right Loan for Your Business

Small business owners also have to be cautious, especially when it comes to loans. Doxford says small business owners need to understand the true cost of the capital and realize that they are building credit under the name of their business, which needs to have a safe track record that they can show to a bank at a later time. He also explains that entrepreneurs need to realize that when they are taking on a business loan, they are often signing a personal guarantee that they will pay off the debt if their business is unable to do so, which is something a lot of small business owners don’t fully comprehend.

Before accepting a loan, Doxford recommends paying close attention to the rate and the annual percentage rate (APR), as well as origination fees and any sort of fees that the lender might be charging – as lenders will often include what he considers to be “junk” fees. He also says it’s important to understand the repayment period, since sometimes “business owners get so excited when they get approved for a loan that they take on debt that they really can’t afford.” For example, if someone is getting a 24-month loan for a piece of equipment that might last up to 10 years, management may consider requesting a longer term from the lender or shopping for an approval with a term that is commensurate with the expected useful life of the equipment.