5 things to consider before applying for financing
From upgrading machinery and expanding your workforce to launching an innovative marketing campaign, building a successful small business requires hard work, a lot of determination and access to cash to invest in the business’ growth.
As the saying goes, cash flow is the lifeblood of small businesses. But for entrepreneurs growing their businesses money can sometimes be tight, so it’s important to understand the various small business loans that are available.
For small business owners thinking about taking their business to the next level, here are five things to consider before applying for financing:
1. Have a business plan
Not all lenders require a formal plan, but it is important to demonstrate knowledge of your industry, articulate that you are passionate about the market opportunity and highlight your competitive advantage.
Be prepared to talk about your credit history and how financing will increase your business’ bottom line, whether it’s to help scale faster, plug a short-term financing gap or fund a large asset.
If you’re unsure how much you need to invest in your company to grow, meet with an advisor before applying for a loan.
2. Compile the right paperwork
Besides an overall business plan, lenders will require financial projections and may ask for tax returns, proof of ownership for assets and current bank statements for you and the business.
Where possible, it’s also useful to have documentation handy that validates the market opportunity and your ability to attract talented employees.
3. Check your credit score
Your credit score is an important indicator of your ability to repay a loan.
If your score is high (above 700), you have a better chance of being approved for a more attractive interest rate.
Request a copy of your personal credit report and check for errors, such as a cable bill you paid on time but that was reported as late. Contact the credit bureau to resolve any issues you identify.
If your score is in the 600s or lower, you may want to take steps to improve it before you approach lenders. One important indicator for credit bureaus is the percentage of available credit you are using at any one time, so aim to keep your credit card account balance, for example, below 50% of your credit limit.
4. Research different lenders
Traditional lenders like banks and credit unions may offer the most competitive interest rates, but the process can often take months, which some small business owners just don’t have.
Merchant cash advances provide fast finance to borrowers with lower credit scores, but the trade off can be shady and expensive lending terms.
Peer-to-peer and marketplace lenders, like Funding Circle, are nonbank platforms that match businesses looking to borrow with investors who want to lend. Wrapped in a user-friendly online interface, these lenders ask questions relevant to the loan you’ve applied for, offer competitive rates and give you a decision in as little as 24 hours.
5. Compare rates and fees before signing on the dotted line
Interest rates and fees fluctuate considerably between lenders and depend on a number of factors. For example, loans that have repayments based on the cash flow of a business tend to be really expensive. Nav, an online resource for small business financing advice, has built some great calculators to help businesses compare the true cost of borrowing across different types of loans.