Businesses, whether they be small or large, should take great value in creating a financial plan. Regardless of the size, businesses use borrowed capital to stimulate financial growth. As you analyze your company and it’s organizations, here are four helpful steps that will help you see financial growth within your own company:
Consider Your Business’ Financial Situation
When you meet with a lender for a small business loan, they mainly want to discuss three questions: 1) Can you repay a loan if it’s granted by a lender? 2) Will you repay a loan? 3) If anything were to negatively affect your business, would you be able to make repayments? As you ponder these important topics that you may potentially face with a lender, consider your business’ credit profile and even your personal credit history.
Does your company look financially stable? Reliable? Trustworthy? If you were a lender, would you grant your business the loan that it’s seeking after? Strive to have a healthy credit profile and history so that you may expand your opportunities and options with lenders. If you do have a less-than-perfect credit score, filing for a business loan may be difficult. However, it’s not impossible.
It is a common trend for lenders to evaluate your pre-existing credit behavior to foreshadow what you will do in the future. When applying for a small business loan, you should be prepared to explain any past circumstance that may have hindered you from having a good credit score. This may help your financial position.
In general, anyone with a credit score lower than 680 will have a difficult time qualifying for a small business loan through a bank or credit union. A personal credit score below 650 will also likely be ruled out for receiving a SBA (Small Business Administration) loan. If you are someone who has a credit score within this range, you will most likely need to look at alternative financing options for the time being. However, taking the chance now to improve your credit score will give you greater business financing options in the future that you might not have otherwise had.
If you don’t have an up-to-par credit score, but your business is otherwise healthy and you can support that statement with facts and numbers (especially the cash flow to prove you can make timely payments), you can still qualify for a small business loan without a perfect personal credit score.
2. Analyze What Your Business’ Financial Needs Are
When it comes to creating and upholding a successful company, numbers should be your best friend. Your finances tell you just about everything; whether or not your business is profitable or if you are more likely to file for bankruptcy. You should be tracking your business’ numbers daily, weekly, monthly, and annually. These numbers can be a big benefactor when it comes to getting a loan. As you become more familiar with your numbers, it will help you understand and predict what your company’s needs will be. It is simply not enough to present how much money you need within a loan, but why you will need the loan in the first place.
Here are the three main reasons why businesses seek out loans:
This is probably the most obvious reason to consider a small business loan. As you put in the work and time, your business will hopefully begin to grow. As your business starts to see success, expansion will be necessary. It happens to nearly every company. Expansion is necessary if you want to avoid your profits from plateauing or dropping. A small business loan can help with the expense of expanding your business without demolishing your operational funds.
When it comes to owning a company, inventory is one thing you need to continuously track. How much does your inventory cost? How much will you sell it for? What profits will you make? This will help you determine your margin gap. Inventory is typically the largest (and sometimes most difficult) expense in many industries across the globe. To run a successful business, you need to invest in products to carry before your customers buy them and offset the cost. When things are running more smoothly, you will need to continue to replenish your inventory to keep up with the demand of customers. A small business loan can help offset your inventory costs without affecting your cash flow.
Having steady cash flow can be difficult for any company, especially when you have customers who don’t pay their invoices in a timely manner. Cash flow can also be a problem when you have old inventory that’s difficult to sell and you need space for new inventory. A small business loan can provide the money that can be used for inventory costs or other operational costs. This will help your business stay afloat even when profits are lower than usual.
3. How Long Will You Need a Loan?
Will you need the loan for a few weeks? Months? Years? This can dramatically determine what type of financing you will need and where you should go to seek it. To give you an example, if your financial needs require capital for the next month for the launch of an important initiative, an SBA (Small Business Administration) loan will not be in your favor. The processing period takes far too long for your short financing timeline.
4. What Type of Financing Will Help You Strategically See Growth in Your Company?
It’s crucial that you educate yourself on the different loan options that are available for small businesses. These main options include, but are not limited to; equipment financing, a short-term business loan, a long (or traditional) term business loan, a business LOC (Line of Credit), working capital financing, and crowdfunding.
As you become familiar with your numbers and create a future timeline, you will be better equipped to know what type of financing your company stands in need of. As you take these financial steps for your company, you will not be guaranteed acceptance to the funds you are looking for. However, integrating a financial plan to help your business see growth will help you become more prepared rather than frantically trying to get approved for financing that your business is in desperate need of.
Within my experience of being a business owner, I’ve seen that there are more options available to small businesses than ever before. The approval process has also changed dramatically. This millennial generation has made it incredibly easier and quicker to get approved for a small business loan, especially online. For example, online lenders are viewing the health of a business differently than traditional credit unions or banks have been over the past years. Technology is also allowing lenders to make credit decisions and offering capital more quickly to businesses. The process can now take days rather than weeks or months. That being said, an online application does require more than simply publishing an electronic form of request.
To help you feel prepared for your loan approval, there are important documents that you will need to present or send over electronically. The type of documents that will be required of you will depend on where and how you go about getting a business loan. However, we’ve learned through experience some documentation that is most likely to be required of you. If you have these documents at your fingertips, it will make your process for a loan much easier whether that’s at a bank, credit union, or online.
The documents that you may need are:
A business license
Business bank statements for the last 3 months
Business financial statements
Personal financial information
Copy of your business lease
Income tax returns
When the time comes that you seek out a small business loan and are approved, it is equally important that you stay worthy of that specific business loan. The most obvious reason why is so that you can keep that current loan. However, it’s almost as important to stay up-to-date on your current loan so that you may avoid any problems being approved for a business loan in the future.
Periodically, take the opportunity to pay down your balance. This will help you avoid keeping your average running balance near your credit limit and allow your lender to build trust and value in your business. It will also create less stress for you when you see the amount of money you are paying periodically instead of paying it in a large sum.
To avoid making repayments difficult, refrain from using your line of credit to cover operating losses. An operation loss is defined as the state in which a company’s operating expenses exceed its income for a given period of time (usually a quarter of a year).
As we have previously spoken about the importance of creating a timeline to become approved for a loan, it is equally important that you review and update that timeline during your loan term. Planning ahead will be a great financial tool in running your business.
As your business undergoes different phases, a small business loan can become a powerful tool in your company to fuel growth and profits. A business loan creates financial flexibility, covers cash flow gaps during your less busy seasons, support expansion, and much more.