It is common practice for the majority of small businesses and start-ups to apply for a loan as soon as possible. The extra financing is usually used to give the company a boost by purchasing real estate, equipment, or paying for services and advertising. Regardless of the reason, the ability to get a loan without too much hustle is extremely important for a small business that wants to stay ahead of the competition. This having been said, lenders tend to be very cautious when it comes to deciding if a small company should get a loan or not. In most cases, this is a result of the short financial history of the company. If a business has not had time to prove that it is financially stable and that it will continue to have profit in the future, then it might be difficult to borrow money.
Luckily, there are a few strategies that have been proven to work, even if a business is only a couple of months old. However, it requires discipline and careful planning. Here is what you need to know:
- Keep Your Financial Records as Clean as Possible (This Includes Your Financial File, Not Just the Company One)
Preparation is extremely important when it comes to ensuring that you can get a small loan, and this requires business owners to keep 4 company aspects in mind:
- Time in Business – This refers to the amount of time that the company has functioned. Lenders are regularly much more trusting of companies that have been in business for at least one fiscal year because this gives them time to prove that it can consistently make a profit;
- Cash Flow – Cash flow refers to the amount of money that enters and leaves the company’s bank accounts. At this point, it is important to mention that business owners must make sure that every last penny is accounted for and properly marked in the company’s financial records;
- Credit Rating – Each credit reference agency has a slightly different way of calculating this value and it is important to check with all of them to determine how likely it is for a company to get a loan;
- Collateral –Almost all businesses are required to offer collateral to borrow money. Whether a company applies for a line of credit or a regular loan, it will have to secure it against its property or the property of the owner;
- Have all the Documentation in Order before You Apply for the Loan
The lenders will request that you present bank statements from the last 6 months, proof of profit from the last 2 years, tax refunds that you might have collected, as well as information regarding all the current debt, leases, and credit adjustments that the company has received in the past. Send an email to the bank inquiring what documents are needed for the specific type of financing that you need. Once you have the list, gather all the documents and go over them in order to ensure that no mistakes slip by.
- Target the Correct Type of Financing for Your Company
Look at the current deals that the lender is offering and determine which one caters to the needs of your company. This also implies taking into account that some types of business-oriented loans may have restrictions that your company cannot get past. Furthermore, certain forms of financing, such as lines of credit may only be available to companies that have gone through at least one full fiscal year.