Small Business Loans: Tips for Securing the Capital You Need
While the market has been improving for small businesses seeking additional capital, a 2016 report on The State of Small Business in America indicates that obtaining capital remains a top challenge for small businesses. A few key findings:
Small businesses remain reliant on banks as their primary source of funding even though there are other alternative funding options that may be more flexible.
Small businesses receive less than half of the amounts they request — applying for a median amount of $100,000, but receiving only 40% of their ask.
Small businesses are asking for more flexible loan terms.
The recent years of uneven economic recovery has caused many small businesses to face low cash reserves and collateral values. While the need for capital may be higher, the post-recession lending restrictions imposed on traditional banks has led to fewer requests being funded.
Get Access to Money When You Have Money
As with all hiccups in life, being prepared is key. According to a U.S. Bank study, 82% of businesses fail because of poor cash management. That telling statistic suggests that small businesses could benefit from access to additional funds at one time or another. Evaluating opportunities for access to additional funding when business is booming is a great first step to being prepared for changing business dynamics or emergencies. Applying for a revolving line of credit or requesting a credit limit increase on the primary business credit card are good options.
Control the Credit Cards
If you are hoping to secure additional capital for your business, keep your credit cards in check. It is never a good idea to max out your business or personal credit cards since this leads to higher interest payments and lower credit scores. In addition, you should think twice about securing additional business or personal credit cards to fund your business. Many small business owners secure another credit card in lieu of getting a small business loan. This can put additional strain on the financial health of the business and lower your ability to obtain reasonable funding solutions in the future.
Mind Your Accounting
Prospective funders will evaluate how responsible you are with your money. The best way to prove to them that you are worthy of a low-rate funding, is to keep your books in good order. If you can demonstrate that your small business has been responsible with its funds, it will be easier to obtain more funds. While accounting can be a daunting task for many small businesses, maintaining accurate accounting records is the best way to monitor the financial health of your business, and will provide prospective funders the best proof of how responsible you will be with any money provided to your business.
Respond to Your Lender
When applying for loans or other sources of capital, your prospective funder may ask you for a variety of information to help them make the best decisions possible on which product to offer you and how much they think you can afford. Even when this information is challenging to put together, it is in your best interest to make it a priority.
Do Your Research
Before You Apply:
Discover what kinds of loans are available to your business. Talk to a reputable alternative lender, like Breakout Capital that focuses on finding a suitable funding solution based on your need, rather than the lender’s. Talk to a bank. Research SBA loan opportunities for your type of business. Understanding the options available to you will help you make informed decisions.
Learn more about what lenders ask for & why.
When You Apply:
Have a detailed purpose for the capital you are seeking. Businesses with a plan to show that the additional capital will lead to increased growth are more likely to secure the amount they are requesting. Be prepared to provide details on how the loan will benefit your business.
Shop around to see which prospective funder can provide you with the best funding solution for your business. If you own a restaurant, you shop around for the best value on quality ingredients—you should apply the same energy when seeking funding for your business to ensure you are getting the capital you need at a price you can afford.
Ask questions. Learn why they offered you the terms they did. This will help you understand how you and your business are being evaluated.
After You Apply:
Read the fine print on any loan offer you receive and are considering. Ensure you understand all the fees and terms of the agreement. Many small businesses make costly mistakes by not clearly understanding the nuances of their funding arrangements. Check for hidden and junk fees. If you find any, ask questions as to why they were included? What was the reason?
Are there prepayment penalties? Hopefully there aren’t, but if so, ask for the reason and ask why.
Does your funder have you and your small business’ best interest at heart or is the goal to charge you as much as possible?
Similarly, are you being responsible and borrowing only what you need?
Is your loan financially going to handcuff you, requiring you to take out additional funds, or do you have a plan in place to cycle you off the debt?
Be a Savvy Borrower
Responsible small businesses have more access to capital than ever before with the evolution of alternative lenders and expanded Internet research capabilities. Selecting options that will help your business grow rather than owe should be the goal when securing additional capital.
View our Financial Educational Series for a complete list of blogs dedicated to helping small businesses understand the nuances of keeping their business financially sound.
