If you are needing to expand your business potential through new hires, new equipment, a larger office space, or new inventory, you might be in need of some working capital to make it happen. Even though you might not be asking for tens of thousands of dollars, it can be difficult to secure a business loan for your needs. There are often strict eligibility requirements, especially when the lender considers your business or the financial investment a significant risk. The good news is that you aren’t limited to a traditional lender for your financial assistance, although the alternative options might be more costly in the long-run when compared to a prime lender. However, if you are smart about your money matters, you make the situation work out to your advantage.
If you are going to pursue business funding options, it’s not as easy as just walking into a bank and asking for a loan. You need a solid, written business plan that you can present to support your request for the funding. Your plan should include the overall operations of the business, but the focus should be on the financial projections that will support your ability to pay back the money that was borrowed. Whoever the lender may be, they are going to want assurances of fiscal responsibility. As they review your application, the lender will consider six different areas of your profile and potentially with minimum requirements in each category that need to be met for approval.
Six Areas for Business Loan Requirements
- Credit Score. Lenders will always check an individual’s personal credit even when the loan is for a small business. It can take time to build your business credit history and strong score, so you will need to make sure your personal finances don’t jeopardize your potential to receive a loan.
- Cash Flow and Income. Your debt-to-income ratio will be important for the lender to assess the risk involved. If your cash flow and source of income are consistent and much higher than your operating expenses, your business will stand a better chance of receiving the loan.
- Age of the Business. It can be difficult for a lender to fully assume the risks of new business because there is very little data that can be shared about income and expenses. Most lenders will want to see a business history of at least two years before considering an application for a loan.
- Debt Levels. In addition to your company’s debt-to-income ratio, a lender is also going to look at how much debt the business has and where it all comes from. Too much debt will make it difficult to get approval with your loan, and some lenders will tell you what open accounts are the most damaging to your business’s credit profile.
- Collateral. Like many personal loans, lenders will look for some form of a financial guaranty in the event that you default on your loan. If you have a loan backed by something of value, it reduces the level of risk the lender must take. Collateral-based loans are often easier to secure than traditional business loans and usually with lower interest rates. Some companies use equipment loans in this way.
- Industry. Your field of operations will also play into how a lender analyzes your credit profile and potential risk. Some of the more fluctuating industries are considered more risky investments, such as construction, accounting, or agriculture. This can have an impact on both the ability to secure financing and the potential terms of the loan.
Eligibility and Loan Types
This criteria for funding is fairly standard for a traditional bank lender, but with sites like https://www.quickloansdirect.com/business-loans/ and Crowdfunding, there are other options for securing the finances your business needs. Depending on the type of loan you are seeking, your eligibility requirements may not be as strict as a traditional loan.
- Business lines of credit are a flexible spending account that provides a cap on a spending amount but allows you to draw on the funds as needed and only pay interest on the amount that was actually spent.
- Equipment loans are taken for any heavy equipment or physical asset your company needs to conduct daily operations, and it uses the equipment itself as the collateral.
- Invoice factoring loans can also be called accounts receivable financing, and this form of financial assistance offers your company third-party payment for outstanding client invoices. The lender pays you the invoiced amount minus a fee and works to collect the debt from the original client. This puts money in your pack rather than waiting on a payment.
- Merchant cash advances allow you to negotiate for a lump sum of cash in return for a percentage of your future sales. These are often collected immediately through the credit card transactions your customers make with you every day rather than a lump sum payout.
- Peer-to-peer lending lets you work with investors through online platforms to borrow what you need and work out payment terms directly with them.
Securing the financing you need to continue your business operations is critical to your company’s health. However, always consider the long-term impact of getting a loan and only borrow what you need.