4 Things You Should Do Before Applying for Small Business Financing
When it comes to your small business, financing is one topic that is top of mind. Having money to invest in your business is essential when you want to manage cash flow, purchase inventory or equipment or hire more employees. When you need funds for your business a business loan from a trusted direct lender might be your answer. Direct lenders can get you the cash you need fast with minimal paperwork. But before you pick up the phone or start filling out that small business financing application, consider these four key items.
Manage Your Personal and Business Credit
Managing your business credit is a fundamental part of running your small business, especially when it comes to applying for business financing. Even though most direct lenders like Select Funding don’t qualify you solely on your business or personal credit, they do pull them and take them into consideration when qualifying you for a loan. Having good credit means qualifying for better terms and rates. When your credit looks good, lenders see you as less of a risk and will potentially qualify you and give you a better deal. This goes for both your personal and business credit, especially when your personal credit is tied to your business. According to the SBA, someone with poor credit history could be paying 12% more interest on their loan than someone with good credit. Having a good credit score and report gives you the upper hand to get the amount of financing you need when you need it. Think about it this way, the more you manage your credit the better chance you have of getting a business loan at a discounted rate.
You should also keep in mind that if you’re thinking about bringing on a business partner or have one already, make sure you know both their business and personal credit history. We know having a partner could be a blessing and helps with finances and day-to-day responsibilities, but it could sometimes be a curse. Make sure there are no surprises so you’re not playing the guessing game when it comes to applying for financing.
Plus, actively managing your credit history protects you from any identity theft. Being your own investigator will safeguard against any fraudulent or incorrect information. The quicker you identify the anomalies or mistakes, the quicker you can fix them.
To make it simple we’ve created a list of things you should look for within yours and your partner’s credit report to make sure the information is accurate:
- Number of trade experiences
- Outstanding balances
- Payment habits
- Credit utilization
- Trends over time
- Public records: recency, frequency and dollar amounts associated with any liens, judgments, and/or bankruptcies
- Demographic information: years on file, Standard Industrial Classification (SIC) code, business size
- Comparative data placing a company’s payment performance in context with its industry
- Company background
- Collection information
Evaluate Your Small Business Before the Lending Company Does
With managing your credit also comes evaluating the financial health of your small business. This means not just your credit score but your business bank statements and how well you manage your cash flow. Almost every lender will look at how well you’ve maintained your business, which includes, the years you’ve been in business, your total annual revenue, and if you’ve acquired debt, how well you manage that. So, before you allow the lender to evaluate your small business give it a go yourself and make sure your answers are on the positive. The most important question to ask yourself is if you take out a loan will you be able to make the daily, weekly or monthly payments to pay it back within the loan terms? Lenders want you to make decisions that will benefit your business and will base your business qualifications on their evaluation, so it is a good idea for you to do the evaluation first so that you know exactly where you stand.
Calculate the Benefits Versus the Cost
When deciding if a small business loan is right for your needs it is important to ask yourself the question, do the benefits outweigh the cost? To get your answer just do some simple math. Let’s say you want to purchase new equipment or inventory, simply add the cost of the loan to the purchase price and see if your profit margin is on the positive. It is important to think about both the cost of the financing as well as the opportunity cost of what you could be losing out on if you don’t take the loan.
Almost all direct lenders will walk you through answering this question and help you determine if you should take the loan today or in the future. Just like it is important for you to choose and trust who your direct lender is, it is important to the lender as well to be honest with you, because they want to see you benefit from the funds, not get buried by them for the sake of your company and theirs.
Time is Money – Plan Ahead
As a business owner, you already know that planning ahead is always a good idea. It keeps you organized and on pace. Same goes for when you want to apply for business financing. When you have that first initial conversation with the lender they will have a set of questions for you and then some minimal paperwork and documents. Every lender is different, so they might have different questions, but the most common questions they will ask will be about your business- how long you've been in business, your industry, what you need the money for, the amount you need, and your annual revenue. It is a good idea to have the answers to these questions ready for a smoother conversation. The smoother the conversation the quicker you will have a decision and money in your account.
Once you have a clear understanding of where your business stands, you will have a better chance of getting what you need when you need it.