Traditional commercial lenders are highly conservative. They don’t just dish out money to businesses. At the core of their business is a desire to make a profit. Besides your ability to repay, lenders want to know if you have property they can sell to recover their money should your business run to the ground.
Getting financing for a business is a challenge for many, especially small businesses and start-ups, to secure financing from lenders. The challenge is compounded when your financial status seems dire. If you want to learn how to get financing for a business, the following seven tips should be helpful:
Tip #1: Submit a realistic, detailed business plan
Lenders understand the importance of a detailed business plan that is both practical and realistic. If you are a small business or a start-up, you may not have much collateral or years of existence to bank on. However, this does not mean a lender won’t provide you with the financing your business needs. The onus will, however, be on you to prove your worth and promise by demonstrating to the lender that you have done your research and that you fully understand the market.
You will also need to demonstrate expertise and ability to execute your plan through a coherent, failsafe system. Your business plan should include a 12-month cash flow estimates and the potential worst and best scenarios. Submit your resume with the business plan as evidence you have what it takes to execute the plan.
2. Build your personal credit score
Establish what your current personal credit score is before submitting a business loan application. If it doesn’t look good, take a few months and try to improve it before applying for business financing. An effective way of ensuring a good credit score is always to pay your bills in full and on time.
If you can convince lenders you are actively trying to improve your credit score, they are likely to look at your application favourably. Instead of attempting to hide red flags on your credit report, be ready to explain them and detail what you are doing to repair them. Should your personal credit history be limited, start building it by getting a new credit card and always pay off your bills on time and in full.
3. Determine the appropriate type of business loan
The right type of financing depends on several factors. Among these are the reasons you are applying for financing in the first place. However, small businesses find themselves in a catch-22 situation. On the one hand, they need financing to improve their cash flow. On the other, lenders consider a healthy cash flow a good indicator of a business’s ability to repay. If you are in your first year of operation, chances are that your cash flow is not looking good. It can become near impossible on how to get financing for a business.
However, you will have to consider non-traditional options, such as borrowing from family and friends and getting business credit cards. You may also consider applying for microloans or get a personal loan, or crowdfund from friends, families, acquaintances, and anyone you can reach online. One possible financial option is by applying for online loans, which will give you the capital that you need for your new business.
If your business has fairly good cash flow and has passed the one-year threshold, your financing options are much wider. These include term loans, invoice factoring and business lines of credit, and SBA loans.
4. Be thorough, prompt, and expeditious
After submitting your application online, or in person at your lender’s offices, expediently provide any extra information the lender may ask for. In your submissions, let them see how organized and committed you are to acting promptly, thoroughly, and expeditiously.
Such traits would be looked at kindly when your application is presented to the loans committee. It will hurt your chances greatly if you are the one causing delays by not providing requested information on time. Also, it won’t help if your application is lacking critical supporting documents.
5. Don’t try to conceal unflattering results
Lenders take their work seriously. They are thorough to the core. Before considering your application, you can be sure of one thing: they will do their homework. They will do background checks on you. They will look at your credit report with a microscope. If you have had a negative result, either personally or in your business, they will know about it.
Rather than give them the extra work of investigating you, volunteer the information instead. Explain what happened and the steps you are taking to rectify the situation. Being honest is extremely good credit and will definitely be appreciated. The converse is also true: hiding negative results will most likely lead to an automatic rejection of your application.
6. Look into alternative financiers
While traditional lenders such as banks are the first port-of-call, there are other equally good funding sources. These include crowdfunding, credit unions, friends and family, factoring companies, and equity investors.
No matter how bad your credit score is, there is a chance you will get a high-risk lender willing to take a chance on you. However, subprime lenders will slap you with punitive terms and interest rates. If you are not prompt with the payments, your business could quickly ground to a halt.
7. Don’t give up
If your application is thrown out, it’s not the end of the road. Find out why it was rejected, improve on what needs to be improved and wait for an appropriate time to give it another try. Remember; you only fail when you quit. So, never quit. Take failure in your stride, brush up, and try again!