Eight Things to Consider Before Applying for Business Financing

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If you’re a growing business, it is inevitable that you will run into cash shortages at some point. In order to keep your operations clicking along at a healthy pace that enables you to continue your growth trajectory, you may want to consider seeking working capital. There are a several questions you’ll want to have answered beforehand to ensure you’re choosing the best possible finance option for your business. We’ve put together a list of eight things to consider before applying for business financing.

1. Do I really need a loan?

Or do you need investors? If you’re looking for growth capital and don’t have a timeline during which you could foreseeably pay back a loan or line of credit, you may want to consider looking for an investor. Investors can also give you invaluable advice when you’re in those critical early stages of growing a business. Here is a great resource with a few additional questions to ask yourself if you’re weighing the pros and cons. However, keep in mind that some lenders have built this benefit into their business model. Several platforms fund their clients through a crowd of accredited investors creating beneficial exposure for growing companies.

2. Can I afford a loan?

In order to determine if you can afford business financing, you should start by creating an accurate cash-flow forecast. Become intimately familiar with the money going in and coming out of your business. To do this you’ll need to first calculate a monthly cash flow, then multiply by 12 to get your yearly cash flow, and finally use the annual debt payments on your proposed loan to determine what you can actually afford. This article will walk you through the process step by step. We also have a great webinar on building your cash-flow forecast.

3. Am I eligible for a bank loan?

Without a doubt, bank financing is the cheapest money to use while growing a small business. As such, it can be very hard to get your hands on. Generally, small businesses need to meet the following criteria:

  • at least three years of tax returns
  • can show that they are profitable
  • good personal and business credit

Keep in mind you may also be disqualified if you:

  • are in a high risk industry
  • have too much concentration (a high percentage  of business comes from one or two clients) 

You will also need to have a significant amount of collateral. It is not unusual for bank to require rights to all of your business’s assets as well as the business owner’s personal assets often including their home. Also, the application process generally takes around two months. If your business can’t wait that long, is uncomfortable with providing a personal guarantee, or doesn’t meet the qualifications—not to worry. There are other loan types to consider.

4. What kind of loan do I need?

If you don’t meet the qualifications for a bank loan, it’s not the end of the world. Here is a list of the 13 most common types of small business loans that will help you explore other options. But, one of the key questions you may want to start with as you consider loan types is:

5. Do I have collateral?

What sort of assets does your business have that might be eligible to put up as collateral for a loan? Asset-backed loans typically have lower rates and can provide more capital than those without. Consider that different lenders specialize in lending against different assets. For example, P2Binvestor can lend against MRR (monthly recurring revenue), accounts receivable, and inventory. Other lenders specialize in purchase order financing or lend against your equipment. Take stock of what would be the best asset for your business to put up as collateral and research the lenders who do that best.

6. How long of a long of a contract do I want?

Different lenders will offer you different loan terms based on your application. Many lenders out there charge you on the full amount of your loan whether you use it or not, so you’ll want to put in some work to determine realistic expectations as to when you want/need to pay it back. Your cash-flow forecast will be useful in answering this question. Also be sure to look carefully at the whether or not there are pre-payment penalties or pre-payment benefits.

7. What happens if I can’t pay it?

Before settling on a finance option and lender, you will also want to know what the possible repercussions will be if you begin to miss payments on your loan. Many lenders require a personal guarantee that if broken, could mean your personal assets are on the line. While this type of guarantee is generally the norm for many lenders, if your business is in it’s infancy and you’re facing a high degree of risk, you may want to consider alternatives like finding an angel investor.

8. When should I reevaluate my loan?

If your business decides to use an alternative lender, there will come a time when you will want to reevaluate whether or not you can now qualify for a bank loan. Don’t worry, alternative lenders are generally aware that we are a stepping stone to get your small business to a point where you are eligible for a bank loan and cheaper cash. We won’t be offended when you’ve graduated to the next step—promise. Small businesses should check-in frequently to determine if and when the time is right to take that step.

These are just a few things to consider before applying for business financing. Putting in the work on the front end to find the right lender or type of business finance for your needs will save you many headaches in the long run. Decided you’re looking for alternative finance but not sure which lender fits your needs? Ask us your questions below and we’ll be happy to steer you in the right direction. 

3 Comments on “Eight Things to Consider Before Applying for Business Financing”

  1. Making sure that you can afford a loan should be your first step in deciding if you want to apply for one. Taking a look at your financial situation and evaluating whether it’s time for a loan might save you a lot of money. Thanks for sharing the tips.

    1. Absolutely, Rachel! It’s also often a question of choosing your growth strategy and determining what sort of investment you need to make in order to scale your business. If you’re able to use a loan or line of credit to invest in initiatives that will 3x your revenue in 6 months, it’s well worth the cost of capital.

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