It can be daunting to consider different financing options, and hard to figure out what type of funding might be the best fit for your business.
Determine if a Loan is Necessary
Taking out a loan is a major decision.
A good first step is to assess if your business needs a loan. If your business has stalled and can no longer scale without more funding, a business loan could help you hire staff faster and may increase your profits.
Say, for example, that your cupcake store is a fixture in the community with lines wrapped around the block. Your growth pattern is steady, but you’ve hit a wall and can’t make any changes toward expansion until you have more capital. In this case, seeking out a loan could be helpful if it means you could purchase bigger ovens, a larger mixer, or hire more employees and keep up with the demand.
To learn more about when you business might benefit from a small business loan, read this.
Types of Loans
The loan you choose will impact your long-term financial goals. If you think a loan may be the right step for your business, familiarize yourself with different types of small business loans and their pros and cons. A few are outlined below.
Small Business Administration (SBA) loans usually guarantee that between 75 and 90 percent of a loan will be repaid, making it easier for lenders to get on board and take a chance on new businesses. However, an SBA loan can require more paperwork and fees, may have strict terms on what you can use the loan for, and may require a longer approval process.
Traditional banks are often the lenders behind SBA loans, but they also work directly with small businesses. Commercial bank loans’ interest rates may be lower than their SBA counterpart, and may have a faster approval process. However, repayment terms can be shorter and loans may be more difficult to get approved.
Alternative lenders were once known for extending loans to businesses without a solid credit history.They were also known for having a quick turnaround time to accommodate those in need of fast cash. While these statements still remain true, alternative loans (sometimes called online loans) have significantly expanded their purpose and their appeal.
Advantages of online loans include a higher approval rate for new small businesses, especially for those that don’t have a lot of credit history. The application process and final funding can also take far less time and paperwork than traditional loans. Sometimes, alternative loans have higher interest rates than traditional loans.
QuickBooks Capital allows business owners to apply for a loan directly within QuickBooks. That means your business’ information is transferred over directly to fill in some of the information required on the application, saving you time in finding funding options that might be right for you.
Small Business Loans: A Checklist
If you’ve determined a small business loan from a bank is the best next step to grow your business, some considerations to weigh and actions to take to get ready for the process are outlined below.
Qualifications and Documentation You Need
Small Business Administration loans and traditional lenders usually require a business plan, and will look at how you plan to spend the loan.
Request your credit score
Request a free personal credit report from AnnualCreditReport.com. Pay close attention to any negative or outstanding issues on your report. Attend to outstanding debts, and if there are errors, address them immediately with the credit bureau. A higher credit score often translates to lower interest rates, and lenders can be more eager to lend to you.
Also, find out if you have business credit report. The three major business credit reporting agencies (i.e. Dun & Bradstreet, Experian and Equifax) compile this information. Check that what they have recorded is as complete as possible, and accurate (including your EIN). Update any changes to your business, such as a new address or contact information.
Generate financial reports
Meet with a trusted financial professional to generate detailed cash-flow report. Your accountant or bookkeeper can help you figure out how if you can collect more cash through receivables, work out longer payment terms with vendors, and offer clients a discount for paying upfront.
These financial reports can help consolidate the information — referred to as the five C’s — usually required by lenders during the credit underwriting process.
- Capital is the money your business needs to produce products and services, as well as maintain your operations. Your accountant or bookkeeper can help identify way to improve your cash flow to keep more capital in your business.
- Capacity reflects the maximum output a business can produce within a set period of time or in consideration of current resources.
- Collateral gives lenders added security; it guarantees you have an additional way to repay to your loan. Your business equipment and accounts receivable can be used as loan collateral. Your financial professional can help prepare the documentation to identify the value of your collateral, as well as ways to improve it, like shortening the period to collect receivables.
- Conditions are the terms for the loan and what your business needs to do to qualify. In some cases, you may be required to fall within specific cash-flow ranges. Your accountant can help you identify advantageous terms (see below) as well as help secure credit from current vendors to keep more cash in your company.
- Character of a business can reflect the character of its owner: loyalty, trustworthiness, and reliability.
Find out if prepayments or early repayments are allowed. See if you can take out extra cash or refinance your interest rate later on. Understand the payment schedule: your business could benefit from an amortization schedule, for example, that helps spread out loan payments. Payments can often be structured to make higher payments at the beginning to pay down the principal and lessen the interest paid over time.
Decide on a fixed versus floating interest rate. A fixed-rate loan can help keep payments stable in the event of economic uncertainty. An accountant can help calculate which type of rate will benefit your company in the long term and balance it with how the loan will affect your cash outlay in the short term. If you opt for a floating rate, a cap can keep the interest on your loan from rising sharply.
Exploring all available funding options and understanding how a loan will impact your immediate and long-term bottom line is critical. With careful planning and consideration, a business loan can help your business reach the next step successfully.