Running a business is exciting, thrilling, and overwhelming all at once. But what’s less exciting? Securing necessary financing to get your business off the ground or grow it in new ways.
Sooner or later you, like many entrepreneurs, may find it necessary to finance a part of your business to stimulate growth, navigate through a slow period or take advantage of a too-good-to-pass-up opportunity. But before you can convince a lender that your business is prime for financing, it’s important to make sure you’re convinced of that yourself.
How can you tell if your company is ready for business financing? Here are seven signs:
You’ve explored other options
The first step in knowing if you need a business loan is if you’ve done your due diligence and explored other options. Financing might seem like an easy way to solve all of your problems and fund all of your big ideas, but at the end of the day, you’re still taking on debt. Never go into debt lightly—instead, look for ways to increase your cash flow and cut expenses without taking drastic measures.
Before you talk to lenders, ensure you’ve exhausted your options and you feel confident that a major infusion of capital could improve your business.
You’ve been in business for a while
This isn’t a hard and fast rule, but it’s one that will make obtaining a loan easier and more affordable. The best term loans are more often available to businesses that have been around for at least year.
There are loan options available for startups, but they are typically for less money (such as SBA microloans) and may have less generous repayment terms than those for established companies. If you’re just getting off the ground, consider whether your company can afford financing or if bootstrapping is a better way to go for now.
You’re not in a risky or blacklisted industry
Businesses in certain industries will find it difficult to get a loan. Industries with so-called reputational risks—firearms, pornography, drug paraphernalia (even in states that have legalized marijuana)—may be turned down for most business financing. If your business is in one of these industries, you may have to look elsewhere for funding—most likely through equity from private investors.
You have good personal and business credit scores
If your credit scores have never been better, now may be the time to consider business financing.
Though a stellar score isn’t a must, you’ll likely land better terms if your score is edging towards the “excellent” range. Many lenders consider both your personal and your business credit scores, so it’s important to stay on top of both.
In fact, the majority of small business owners don’t even know their business credit score, according to a survey by Manta. If your scores aren’t sparkling, there are a number of business loan options out there, but you may want to wait until you repair any damage to get the most affordable loan possible.
You’ve considered the opportunities and know what you need
Opportunity is knocking and you’ve decided you need a loan to seal the deal. Before you submit that application, it’s important to consider exactly how much you need, and why you need it. A lender is going to want to know all of the whys and the hows before you ever see a penny.
Many lenders and institutions, including the Small Business Administration, require that you submit a business plan or loan proposal with your loan application. Your plan should cover how much money you’re seeking, why you need it, and how you expect to pay it back.
Eyeing a potential partnership that could be a boon to your business? Lay out your plans and outline the opportunity for growth before you start an application.
You are heading into a slow season
Generally, the best time to apply for a loan is when you don’t need it. That said, many seasonal businesses use financing to offset slower months and help even out any cash flow issues. If you are approaching a slow season, consider preparing your cash flow and expense forecast statements now to give lenders the overall picture of your business’s finances.
Keep in mind most traditional lenders will favor businesses with consistent sales throughout the year, so you may want to consider alternative online lenders instead.
Your business is profitable
Generally speaking, loans are not for propping up struggling businesses. Every business goes through ups and downs, but if your company is consistently down, lenders will be less likely to fund you because you don’t have a demonstrated history of making money—and you’re at a greater risk of default. A business with consistent, positive cash flow will have more options at better rates than one with variable profits.
Many small business owners see financing as a lifeline—but there are many instances where a loan product can help take your business to the next level. If you’ve determined a loan could help catapult your business into new heights, it’s likely a lender will see that as well.