Small Business Resource: Here's How to Borrow Money, Mate

Here are some invaluable tips on how small businesses can navigate the risky and difficult task of obtaining a bank loan. The tips are from today's Sydney Morning Herald. In a global market, they are just as relevant in the U.S. as they are Down Under.

Be Conservative—Big banks tend to use a worst-case scenario when they determine how much money—if any—to lend to a small business. The bank will base the lending decision on the small business's value, determined as a function of cash flow, not equity. In one case, the value of a business was based on how much the small company would fetch in a 30-day fire sale, minus 10 percent, just to be safe.

Small businesses should have a realistic sense of how a potential lender will value their business, and be conservative when it comes to requesting money. It's best to start with a small loan, and establish a good track record and relationship with the lender, laying the ground work for additional funding in the future.

Demonstrate Sustainable Business—Matthew Holland, who owns several Mortgage Choice franchises, said the businesses are profitable and worth millions. It took him years to find a bank loan to grow the businesses, though. He eventually established a consulting firm, bizpanel, to share his experience with other small business owners.

The chief lesson: show that your business is sustainable. If you can establish your company for a year before you seek financing, the odds of raising money go way up. If you can wait two years, so much the better.

Put Some Skin in the Game—The days of no-down payment mortgages are over, and so are the days of zero-equity business loans. Be prepared to invest one dollar of your own money for every dollar that you borrow from a bank.

The hurdles to small business borrowing are high. But it's better to understand these obstacles, and establish a realistic funding goals that actually can be achieved.