Borrowing Money for Your Small Business

One the most important steps in building a small business is making sure the company is adequately financed.  The trick to getting small business access to cash – especially if the business is new / early-stage — is having a smart business plan and well-thought out projections of financial performance.  There are lots of financing options available and funding for a small business and even a start-up is more accessible than you may realize.

However, the one thing any entrepreneur should know, any institution willing to invest in a small business (whether through a loan or other means) will want to make sure their investment is sound.

Typically, a business has to achieve a positive cash flow before even being considered for a loan.  This may seem counter-intuitive – how does one jump start a business without a loan or financing in the first place?

The truth is whenever a business owner seeks funding, the business needs a business plan in place and should be able to demonstrate a need for the company’s product or service in the marketplace.  An entrepreneur may even have to stretch a few credit cards and /or go through some savings in order to jump-start the business.

Once the business is off to a good start, the business owner can start approaching lending institutions for financing.  First the business owner will want to make sure of the following:

• Good Credit history? Business owners should always check their credit first before applying for a loan to ensure there are no mistakes or issues and can go to go to TransUnion, Equifax or Experian to look up their credit score. A bad or low credit score may affect a business’ ability to secure financing.
• Equity? Equity, according to the SBA, can be built up through “…retained earnings or by the injection of cash from either the owner or investors.” This is a critical aspect that most banks will look at as “…banks want to see that the total liabilities or debt of a business is not more than four times the amount of equity.”

Some of the questions an institution may ask on a loan application are the following:

• How many years has the business been in existence?
• What is the business’ estimated annual revenue?
• What is the business type?
• What is the total amount of financing that you are seeking?
• How will you use the money?
• Does the business pay its bills?
• Does the business control its inventory?
• Does the business control expenses?
• Are the officers committed to the business?
• Does the business have a profitable operating history?
• Does the business match its sources and uses of funds?
• Are sales growing?
• Are profits increasing as a percentage of sales?
• Is there any discretionary cash flow?
• What is the future of the industry?

The most basic type of small business loan is debt financing, which means borrowing money that must be repaid over a period of time, usually with interest. This may be a loan that can last less than a year or a long-term financing which is considered any amount over a year (usually the cap is 25 years).  Banks, savings and loan institutions, credit unions are usually where many small business owners go to get their loans – but these are not the only option available for a small business owner.

In today’s marketplace, business owners seeking small business loans usually experience a complicated business loan application with an extended review and weeks or months before receiving the necessary funding.  A number of companies have successfully streamlined the business cash advance application and approval process and are able to approve and fund up to $1 million of financing within as little as 24 hours. These lending companies are also able to approve borrowers with a negative credit history and have greater flexibility than traditional banks and lending institutions.