How to prepare yourself for a business loan.

July 25th, 2019

Nowadays, speed and comfort drives a large portion of our business choices. You might have tried applying for a business loan through your bank, but when you realize how much time and effort it takes to go through the application process, it’s not uncommon to just give up and look for alternatives. Completely understandable.

If you’re like 99% of all businesses out there, there comes a point in your journey where you’re going to need access to capital. Over the past decade, since the crisis of 2009, online lenders (or alternative lenders) have entered the market, making access to capital easier for businesses to obtain. Let us take a high-level overview of the pros and cons of getting an online loan.

THE PROS

  • It’s a fast application process, typically 5 – 10 minutes
  • The turn-around is quick, typically 24 – 48 hours
  • You’re more likely to get approved

THE CONS

  • Interest rates can be north of 90% in APR (Annual Percentage Rate)
  • Debt traps (predatory lenders sometimes roll old loans that couldn’t get repaid into new loans at even higher interest rates)
  • Beware of pre-payment penalty fees

In order to avoid the risks mentioned above it’s critical that you plan and prepare and don’t apply for one of these online loans when you’re in a total cash crunch. Below are some steps you can take before you apply for one of these online loans:

1. Know your credit profile

There is a personal credit score (FICO) and then there’s your business credit score, which is provided by Experian or Dun & Bradstreet. Those scores, along with your length in business and yearly historical revenue, are one of the first things an online lender will look at when evaluating your loan application. It’s important to know how good your score is before you apply.

Having a healthy credit score will allow you to not only get access to capital at affordable rates with friendly terms, but you’ll also be able to get better terms from your own vendors and suppliers. They check those scores as well.

2. Improve your credit scores

Don’t get discouraged if your business credit rating is not top notch — there are some simple ways you can increase your business credit

  • Create your business credit profile. To get started ask at least one of your vendors or suppliers to report your payments to the credit bureaus. That will instantly build your credibility because you have at least a few trade lines established with some positive payment behavior.
  • Check if there are errors in your report. It turns out, 25% of business owners found errors on their business credit reports, which consequently put their business into a riskier category. Some mistakes might be as simple as a misspelled business name or an incorrect SIC code.
  • Monitor your credit rating. As you start to build your creditworthiness, you’ll want to make sure that you can keep it for as long as possible. Check your reports every few months to make sure there are no negative surprises next time you’re applying for a loan.

3. Come up with a plan to repay the loan

When you apply for financing, your lender will want to see that you have a an operations plan for your business, how you’re going to execute on it, and how you’re going to finance it. You want to make sure that the financing you’re getting fits your business and that you have enough cash flow to repay the loan.

If you’re getting a short-term loan to bridge the sales cycle of a large customer or if you’re getting a long term loan to financing the purchase of machinery or real estate, they are entirely different scenarios that require different planning.

Most importantly you want to make sure that the financing will yield revenues and cash flow that you can use to repay the loans as quickly as possible to avoid falling into any sort of debt traps.

The Small Business Administration (SBA) offers a free business plan writing guide.

4. Understand your business financials

You, the owner of the business, need to know exactly where your business stands, from a profitability stand point.

It’s common that during the loan application process, your lender will ask you to provide a profit and loss statement of your business as well as historical bank statements. If you come up with projections on how your profits, i.e. cash flows is going to grow, you should be able to confidently explain how you arrive at those numbers based on historical metrics and with the help of the loan.

Have a worst case, base case, and best case scenario in place and plan for the worst — if there’s a downturn, or you happen to lose some key customer accounts, or if a new competitor enters the market, or if someone critical in your team leaves the company — are you still able to repay the loan in that scenario?

Staying on top of cash flows is critical and take the time to prepare and plan before you apply for a loan — it pays off, both from a financial as well as an emotional stand-point. Building a business is hard and you deserve the best financing solution out there to help you succeed.

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