Securing financing for your small business when it most needs it can be ‘make or break’. Small businesses are especially vulnerable to the volatility of poor trading conditions like a recession.
Even a minor dip in sales revenue can send a start-up or small business to the wall, and this is why lenders need to know their funds are in good hands. While the process to get a loan is stringent the positive is when you get the approval, you know it’s due to have a robust business model.
Thankfully, there are steps you can take to improve your chances of success with a lender. Here are some essential tasks that must work well for you before applying for business finance.
Well-Grounded Business Plan
Having a sound business plan is key to securing investment for your business. You need to make sure that you have a complete, realistic business plan that articulates every facet of your company. The executive summary must present what you do, who for and why it’s a great offering, so lenders are encouraged to delve deeper into the detail of the plan.
Improve Your Credit Score
If you’ve ever applied for a credit card, a home loan or personal finance you’re already aware of the importance of a good credit score. The same conditions apply for companies they too must have a good business credit score – if not your options for finance from tier-one lenders, i.e., banks, are limited.
Learn how your credit score is calculated and stay up-to-date with it so that you know if anything needs doing – like paying off business credit cards and other loans – before applying for new funding. If you’ve just started your business and it has no credit history, your credit score may be taken into account if you apply for a bank loan, so keep on top of that too.
Invest Your Own Cash
Putting some of your cash on the line is one way to increase your chance of success when applying for a business loan. Typically, lenders favor applicants who have at least a 25% equity stake in the company that they are applying on behalf of. And, being able to put some of your own money down will mean that you can borrow less and will start your business off in less debt.
Rent Your Premises
Purchasing an office building might seem tempting if you can, but lenders tend to prefer businesses that rent, rather than buy their workplace. This is because they prefer to see you investing your money into assets that will generate income for your business, such as equipment and inventory.
Of course, if you own commercial real estate and earn an income, lenders view this investment favorably. Personal assets can be used as security for loans. Often small business owners need to use their assets like property as security to get a loan for their company.
There are many options for funding your startup. Most small business owners approach their bank for loan. If their bank doesn’t approve the funds then the other options include:
- approaching a second-tier lender, i.e., non-bank institution
- applying for a government-backed loan
- seeking out investors like an angel investor
Plus, there are more small business funding options too, including:
- a business credit card
- taking out a small business line of credit
Even with a solid business plan you might have better luck avoiding the banks altogether and applying to a small business funding circle, including private investors like angel investors. This action does not relieve you from providing the fundamentals that show the health and potential of the business.
Lenders are in the business of lending money to make money. They need to know your business is a sound investment and can afford the repayments. Every lender, from your angel to top-tier banks, needs to earn a profit from their investment, and they, as such, conduct risk assessments before approving the loan. The higher the risk, the higher the interest rate too.
Offering a slice of the business may also be another way of securing investment from private investors.
At some stage, all businesses need to borrow funds to grow. Therefore is no need to shy away from seeking funding for your business. Ideally, your first action will be to ensure you have a good credit rating, a robust business plan, and some skin in the game.