Entrepreneurs and business owners cite financing as one of their biggest headaches, especially if they are in the early years of their venture. Cash will help you grow and expand, and give you the freedom to develop your company in the manner you desire.
Finding the right and adequate source of finance is not easy, especially for micro and small businesses. According to the Joint Small Business Credit Survey 2014, the credit market is toughest for startups and smallest firms.
Only 25% of microbusinesses receive all financing applied for whereas 52% received none. 50% of small businesses get turned down when they apply for financing.
It’s not just financing that is of importance, timing is also important. Some institutions like SBA take a long time to guarantee financing and processes also involve a lot of paperwork.
If you are a business owner you need to keep a few things in mind which will help you get financing in a hassle-free manner. Let’s see what they are.
Maintain a Good Credit History
Applying for business loan is pretty much similar to applying for personal mortgage. Your credit history will be scrutinized and your financial behavior will be studied.
Before applying for big loans clean up your credit act. Always remember to make payments on time and try to reduce debt as much as possible. Responsible behavior with earlier mortgages will put you in a favorable light while applying for loans.
Many banks and lending institutions will require a personal guarantee from your side, or sufficient collateral from within the business. If you are a profitable business operational for more than three years and do not have unmanageable debt, charge-offs or unpaid balances then you stand a good chance of getting a loan.
Business plans, cash flow and profit forecasts also need to be prepared and submitted. Extensive documentation is unavoidable and you need to have all your papers, authorizations, registration details and tax reports ready.
Establish Good Relationships
Lenders like to do business with people they know and trust. If you approach a lender for the first time with the purpose of getting a loan, a favorable response cannot be expected.
The groundwork that you do prior to applying for business financing will determine whether your efforts pay off or not. Maintain good working relationships with people at lenders. They will also be able to guide you and provide valuable tips to manage your business money better.
When time comes for you to get financial help to grow, expand or cover seasonal sales fluctuations you know who you have to turn to.
Be Ready with Your Story
Lenders need a very good reason to dole out dollars to you. Give detailed and comprehensive reasons behind why you are soliciting financing.
It should be a fine-tuned business pitch which will not only highlight your past successes and achievements but must also list your future prospects, and how the financing is going to help you reach your business goals.
If you have partners all need to be on board, and should be ready to provide personal guarantees or collaterals, if need be, to secure the loan.
Choose Lender Wisely
Keep in mind that all lenders are not suitable for all types of business financing. The type of business you are in to, its size and revenue, and location all affect lending decisions.
National banks and large commercial lending institutions usually prefer established businesses with excellent revenue streams and good credit history. They hesitate to give smaller loans that are less profitable, but require the same amount of underwriting and servicing as larger loans.
Speak to banks and lenders with whom you already have working relationships. They might find it easier to lend to existing customers and banking partners.
Community lending institutions, local banks and credit unions have interest in the economic advancement of specific regions and will be willing to consider your application favorably, if your business is local.
Non-bank lenders and crowdsourcing also are sources of business financing. There are lenders who specially cater to startups and microbusinesses. There are several types of loans available, so make sure you do your research and browse sites like Fundastic and Fundera to find out more. Kickstarter (for creative ventures), LendingClub, Prosper and Dealstruck are other names in non-bank peer-to-peer lending scene.
Think about Alternatives
Sometimes you may be in need of quick financing and cannot afford the long wait a traditional loan application entails. Or something might have compromised your creditworthiness. In such cases you can make use of asset-based lending and factoring to cover your financing needs.
Asset-based lending is similar to traditional financing or loan process. The lender evaluates the inventory, account receivables and other fixed assets excluding real estate to extend a line of credit. The liquidity of assets, the profitability and the period you have been in business are all considered before advancing a loan.
Invoice factoring allows you to raise funds on your accounts receivable. You will be able to rise up to 80% of the face value of fresh invoices. You can repay the loan to the factoring company after your customers clear their dues.
The fees and interest rates are high in these types of financing, but you have the benefits of quicker lending and get access to more cash.
Though funds are hard to come by you will come across plenty of fly-by-night operators who will promise you loans on terms that are too good to be true. Some lenders might try to hurry you up and speed up the process without explaining the terms clearly.
Do not go for lenders who you are not comfortable with. Do proper background checks, read online reviews and speak to trusted people before making up your mind.
Build Your Experience
Before going for big business loans, hone your experience dealing with smaller amounts of borrowed money. If you are a new entrepreneur, a sudden influx of funds might not be easy to handle.
Business credit cards and trade credit will help you gain experience dealing with diverse types of credit accounts. And you do not have to worry that loans damage your credit history, because they do not. Positive payment history will reflect well on your business credit scores.
Use the credit to grow your business and increase sales. Good business credit behavior will help you when you apply for financing the next time.
Persevere with Your Efforts
Financing may be difficult, but is not impossible. Collaterals are necessary but are not the sole criterion. Small Business Administration (SBA) says that it does not reject applications ‘if the only unfavorable factor is insufficient collateral’.
A combination of favorable factors like sound business purpose for financing, good credit history and solid business plan will all help you get a positive response from lenders.
There are non-profit micro lenders also who provide small and mid-size loans at fair interest rates. You can approach them if you cannot meet higher interest rates that are sometimes prevalent in non-bank financing options.
Look out for niche alternatives in your industry where individuals or institutions are willing to help out newer players.
Thus you can see that if you look hard and long enough there are financing options available to gritty business owners.
Business financing is a hard game, but if you are well-prepared, informed and patient it will not be tough to get your business the money it deserves.