The funding strategy a business selects is something unique to each company and needs to be precise. Before an owner sets out and applies for financing, he or she needs to know what options are available and what direction should be taken.
The good news is as a business owner, you have many options when it comes to business financing, but the key is choosing which option will work best for your situation. Each financing option has its advantages and disadvantages, and some could be a much better fit for existing businesses than to startups. It’s important to do your due diligence by conducting a fair amount of research so you can ensure you make an informed decision prior to moving forward and submitting a business credit application.
Here are five simple questions to help determine which financing option may be a fit for your business.
Do you have a detailed business plan that shows financial projections, cash amount needed and what the funds will be used for?
Having a business plan is one of the key items required for any small business loan application submitted according to the Small Business Administration website. A well written business plan shows lenders, banks or credit unions that you understand your industry, your customer, and can generate the cash flow needed to make loan payments on time. “Business plans aren’t just for startups seeking a loan—that’s really a myth about small business planning, ” says Sabrina Parsons, CEO of Palo Alto Software.
How are your personal credit ratings and how much debt do you have?
Credit scores play an important role in one’s ability to successfully obtain business financing. According to the Small Business Administration (SBA), credit scores reflect how well you handle money. Business lines of credit, business credit cards, business loans, and other traditional forms of financing all require personal checks as part of the lender’s credit granting decision.
With strong personal credit ratings, banks interpret that the applicant has the proper skills to manage finances. Additionally, a business owner can improve their overall credit standing and chance of approval by keeping their credit utilization on revolving credit card accounts at or below 50% with 30% being ideal.
What kind of collateral (business and personal) do you have to support a business loan request?
Banks require collateral that can guarantee a traditional business loan if it goes into default. The amount a bank will lend to a business largely depends on the value of the collateral that the business owner is willing to pledge. Although online lenders may not require collateral for a business loan, the interest rates charged are substantially higher.
Does your business have outstanding invoices?
Rather than struggling with unpaid invoices, you can recover some of the funds by converting unpaid invoices into cash. Invoice factoring also known as accounts receivable financing enables you to sell any outstanding invoices to a private lender in return the lender will give you a percentage of the funds due to your company. Once the customer pays the invoice in full, the lender will send the remaining balance owed, less the fees due to the lender. If your business has a time gap between sales and payments, then this financing option may be an option to consider.
Does your company have healthy cash flow?
Strong cash flow shows a bank that the business has enough cash to make monthly loan payments in addition to covering its operational costs. As a business owner, it’s essential to understand how much cash is flowing through the business. “If your business has too tight of a margin, work toward lowering expenses or finding ways to grow revenue before applying for a loan, ” says Jay DesMarteau, head of small business banking at TD Bank.
Remember that the business financing options listed here are not a one size fits all. All types of funding programs are different among lenders so be sure to take the necessary time to research which option is right for your business.