Before you start delving into applications, appraisals and lenders, think about your business' financial standing. You should never take on more debt in order to have money in the bank; it must add value and pay off the interest and fees on the loan in order to be worth the hassle and expense. Once you've run through your alternatives, consider a loan by asking yourself these 8 questions:
1) How Much Funding Do I Need?
Make sure you know exactly how much money you need for what you are planning. The best way to do this is to create a monthly cash-flow projection. Lenders want to see that you have thought this through and having a plan for how you'll pay back the loan will assure you that this idea makes sense for your business. If you're making a purchase, adding staff or investing in marketing, take account of the costs and projected revenues you can expect from this project before submitting any loan applications.
2) How Much Is My Business Worth?
Lenders want to know that your business is worth enough to cover the loan. You need to have a sustainable business model that will last at least as long as the term of the loan you are seeking because most loans require you and your business to be in solid financial shape, including good personal credit scores, and consistent revenue. You should consider getting an appraisal of the business and business assets, such as equipment, if you plan to take out a collateral-based loan.
3) What Is The Money For?
Lenders want to see a detailed plan for the money. If you plan to purchase new equipment, you need to show price quotes and demonstrate why you need the equipment and how it will benefit your company's growth. Different loans will be tied to specific expenses, such as equipment or construction, so consider what kind of loan you'll need based on you're business needs. Lines of credit can be more flexible than term loans or real estate business loans, so if you have a few different uses for the working capital funds, consider leaving term loans for the future.
4) Will The Money Help My Business Grow?
If you're trying to borrow money to cover payroll or other everyday expenses then your business may not afford you the ability to continue paying those expenses when the loan money is used up, much less to pay back the loan. Business loan money is best used for bringing in more revenue. See it as an investment in the growth of your company, which will pay you back in larger profits.
5) How Urgent Is My Financial Need?
Whenever possible, it is better to anticipate future needs than try to find money under pressure. It's much easier to get approved for a loan when your business is doing well than when your business is struggling, so plan ahead. It can take some time to get approval from a traditional bank, but if you need funding sooner than that, online or alternative lenders can sometimes offer as little as 24-hour approval and funding. If you're looking for a Small Business Administration (SBA) loan, which offers great rates to businesses that qualify, try to account for several weeks to several months until approval.
6) How Are My Personal Finances?
Until your business grows beyond a "small business" (upwards of $5 million in revenue per year), lenders are going to rely heavily on your personal financial situation and credit score in determining the creditworthiness of your business. So make sure that you are in good standing before applying for a loan. Pay off debts, check your credit report for any mistakes, and avoid any big personal or business decisions during the time that you are applying for a business loan, like taking out a mortgage or opening several new credit cards.
7) Will I Qualify For A Loan?
Applying for a loan and being turned down will hurt your credit score. It's a good idea to contact lenders and ask for their specific requirements, such as credit score and cash flow, before you apply. Many lenders require businesses to have been in operation for over a year before you'll be approved for a loan. Each loan company will have details on their website or by talking to customer service representatives, and approval will be based largely on the financial security of the business.
8) How Strong Is My Business Team?
Businesses looking for funds to grow need to show the ability to effectively manage the growth. You may need to show your lender who's on board with making this growth happen and what kind of experience you and your management team have with projects of this caliber. It's common for lenders to ask for the business owner's resume, which may seem odd, since you're not looking for employment, but can help the lender determine your qualifications for the loan.
Before applying for a growth loan you need to make sure you have thought through your needs, reviewed your current financial situation both for the business and personally, and considered all of your options. If you can show that the money will be used to increase revenues then you are well on your way to qualifying for a small business loan. Ready to apply for a loan to grow your business? Make sure you're properly prepared with this small business loan checklist.