3 ways to help your small business clients with financing
Many of your small business clients aren’t just worried about taxes. Also at the top of their list are concerns about securing financing – and you may be just the expert to help them.
When it comes to small business financing and funding, entrepreneurs often need three types of help and advice:
1. Preparing for financing
The first basic step business owners must take in order to get financing in the name of the business (rather than personal financing) is to separate their business and personal bank accounts. Unfortunately, roughly one in five business owners are using personal accounts for their business. Accountants can spot this problem and help clients understand the importance of opening a business bank account to keep business finances separate from personal.
Additionally, the business should operate under its own business structure, such as an LLC or S or C Corp. It is very difficult for a business to secure business financing as a sole proprietor. An accountant can be helpful by explaining the tax implications of various business structures to clients so they can make an informed choice.
Once those steps are accomplished, and the business is ready to seek financing, the real fun begins. Getting financing often means gathering and submitting paperwork, including copies of tax returns, as well as pro forma projections. Some lenders will want to know how the business owner plans to use the funds secured. Some may want to link to the borrower’s bank account to evaluate cash flow, while others may want to link to the business owner’s QuickBooks account (which must be up to date).
Some lenders will consider the businesses’ debt service coverage ratio – the ratio of cash available for debt servicing to interest, principal and lease payments – and most will want accurate sales figures. A business owner operating by the seat of their pants may not readily be able to produce the data needed to satisfy the lender, but his or her accountant can.
2. Researching options
There are over 44 types of financing offered to small business offered through literally thousands of lenders. The average small business owner spends an average 26 - 33 hours searching for financing, according to Federal Reserve small business research, and just over one in five are so discouraged they don’t even apply.
The search for financing may be a once a year (or even once every few years) effort for most entrepreneurs. Accountants who are savvy about this process can help clients cut their learning curve and focus on the types of financing most appropriate for them. This involves becoming familiar with small business financing options, which can be accomplished with freely available information and CPE-eligible training.
3. Evaluating offers
Unlike consumer loans, commercial lenders are not required to disclose an annual percentage rate when offering financing. Some loan offers come with confusing or even misleading descriptions of costs. An unwary entrepreneur can get trapped in an unsustainable loan that can quickly run the firm into the ground financially.
Accounting professionals are in an ideal position to help the small business borrower understand:
● The true cost of financing;
● How the cost of one loan compares to another;
● Whether the loan is sustainable for the business in the long term; and
● Problematic or risky terms such as hefty prepayment penalties, daily withdraws, etc.
Accountants don’t have an aversion to crunching numbers the way some small business owners do, and free tools such as these small business loan calculators can make it easy for accountants to gather the information they need to help their clients make financing decisions.
Is it worth the time and effort to develop an understanding of financing options? According to Federal Reserve research, small business owners name accountants are one of their top sources of financing advice. Your clients expect it of you.