Working capital is the life blood of any business, whether it is for starting-up your business or keeping those doors open! To keep everything running smoothly and be able to scale your business, it is a necessity to have some sort of financing in place for when opportunities present themselves. As a Small Business owner the first place to start your financing search is with your principal bank. Payment and deposit history goes a long way but even with a stellar history they might still decline you due to credit score and time in business. Banks usually don’t lend to startups but other financial institutions like Credit Unions, Investment Banks, and Online Lenders do take the risk on these type companies. Below is a quick run through of what you need to get through the application process and get a business loan funded!
1. Purpose for and Total Funding Amount for Business loan.
Not to be confused with a business plan, this is the first step in figuring out what type of financing is the best fit for you. Most start ups already have the why down pack and really only see a number in there head to get started. As an owner, understanding why you need the money and being able to vocalize your reasoning is key to success.
2. What can you actually qualify for and afford.
Once you have determined the need and amount of the business loan, the next step is to see what the company qualifies for and the amount that realistically the company can afford.
Collateral, time in business, personal & business credit score and industry type are the main factors lenders and banks look at before qualifying a company for commercial financing. To obtain the best rates and products everyone of those factors need to be high scoring. Without one or two of those factors options get cut down quickly.
Every business owner wants a million dollar loan to be repaid on the best terms, but instead of asking how much can I get, think about how much can my business afford to pay back. No one wants to take out more debt than the business can handle. To avoid these possible issues its best to calculate your Debt Service Coverage Ratio, which is simply Cash Flow / Loan Payment = DSCR. The Ideal ratio that lenders are looking for is a DSCR of at least 1.5 or greater.
3. Identify which loan product best fits the company’s needs.
After clarifying the purpose of funds and qualifying the applicant’s creditworthiness, the next step is to pick which product best fits your company’s needs and funding timeline.
- Business Lines of Credit – Financing in which you have access to a pool of funds which you can draw from and only repay with interest on what you borrow.
- Invoice or Receivable Factoring – An advance for services already rendered. Meant for companies that collect on a net 15 30 60 and 90 days. Factor takes possession of invoice and pays you the invoice amount minus a fee and they collect from the client.
- Equipment Financing – lets you finance 100% of the equipment value. So you can purchase industrial and general-purpose equipment, specialized machinery or computers, vehicles, or whatever you may need.
- SBA-backed Loans – Financing endorsed by U.S. Small Business Administration.
- Term Loans – Are usually for three to 25 years, uses company assets as collateral, and requires monthly or quarterly payments from profits or cash flow. The loan limits other financial commitments the company may take on, including other debts, dividends, or principals’ salaries and can require an amount of profit set aside for loan repayment.
- Merchant Cash Advance – Advances you a lump sum for a percentage of your future sales.
- Unsecured Business Loans – Loans that don’t require collateral, such as credit cards and lines of credit.
4. Submit Financial and Legal Documents
When submitting an application for funding, banks and traditional lenders typically ask for a long list of stipulations required prior to funding which include.
- Drivers License
- Voided Business Check
- Credit Report
- Bank Statements
- Credit Card Processing Statements
- List of Real Estate Owned
- Personal Tax Returns – 3 Years
- Business Tax Returns – 3 Years
- Personal Financial Statement
- Debt Schedule
- Current P&L and Balance Sheet Year-to-Date
- A/R and A/P Reports
The traditional bank loan is very time consuming and full of paperwork and red tape. The usual timeline for funding on these products are between 3-5 weeks, so if you are in a rush for funding you should explore other options such as Online Lenders. They have a streamlined process with minimal paperwork and and less stringent requirements. With good credit and strong business financials, you can receive comparable rates to traditional Bank Term Loans.
5. Provide Collateral
To qualify for most small business loans, collateral must be submitted to secure the loan. Collateral is an asset, such as equipment, real estate or inventory, that can be seized and sold by the lender if you can’t make your payments.
SBA loans require significant collateral for security on all loans, plus a personal guarantee from every owner that has a stake in the business.
Online lenders usually do not require collateral with speeds up the process and allows the client to receive funds sometimes within 24 hours!
If you don’t have collateral to get a loan or don’t want to take on the risk of losing personal or business assets, a Revenue Based Business Loan or a Working Capital Loan might be a better option.