Whether you’ve been in business for just a few years or a decade, there comes a time when your business might need a helping hand. The small business financing industry has grown immensely over the past few years, giving business owners and entrepreneurs multiple financing options. Financing options range in size and requirements depending on whether your business needs working capital or you need to replace equipment. Before you begin any financing application, make sure you’re prepared to take this massive step with the help of this guide to small business financing.
Lendr created a Guide to Small Business Financing
Life doesn’t always follow a strict plan, and sometimes you need a helping hand. The small business financing industry has increased over the past years, and entrepreneurs have multiple types of business financing options available to choose from. Whether businesses are looking for working capital, replacing equipment, or paying their bills, there are various options at an owner’s disposal.
Applying for financing is a huge benchmark for many small enterprises, but before you begin, the application process takes time to review your company thoroughly. Loans can be stressful, plain, and straightforward. If you’re prepared from the beginning and do your due diligence, you can reduce your stress dramatically and emerge a wiser business owner.
Does my business truly need financing, and what is the best option for my company at its current growth stage?
If you decide your business needs additional financing, make sure you’re aware of and understand all the options available for your business. Then, take a moment to ask yourself this: does my business truly need financing, and what is the best choice for my company at its current stage of growth?
It’s also important to recognize the difference between traditional and alternative business financing. Traditional lenders are risk-averse and base your loan decisions on your credit score, cash flow, and payment history. The application process also takes several weeks before funds are made available. On the other hand, alternative forms of funding, like merchant cash advances, have quick turnaround
times and assume most of the risk. Whichever funding options you choose to pursue, make sure you understand the pros and cons of each, so you know what to expect and what is most appropriate for your business.
Traditional vs. Alternative Funding Options
You need to keep in mind two big things if you choose a traditional funding option: understand your credit and know your use case. When it comes to determining small business loans, credit is king and will strongly affect whether a lender or bank decides to work with you.
Start by separating your business and personal finances to give yourself a chance at building your small business credit history. It might be tempting to mix the two, but the trouble with overlapping finances is it can be difficult to distinguish between the two
when it’s time to file taxes. To maintain a healthy credit score, consider the following tips:
Planning For a Traditional Loan
For your business and personal reports, double-check to make sure there are no mistakes that could negatively impact your credit score. If you do spot an error, report it immediately. You can request your credit reports for free on Experian and Credit Karma sites.
Check For Errors in Your Report
If you owe federal or state tax liens, get started on a payment plan or try to pay off the entire lien. But, first, pay off at least the monthly minimum on your credit cards and take care of any late payments. Any late payments will stay on your credit report until it’s been successfully taken care of.
Clean Up Late Payments and Tax Liens
An excellent credit score results from making good habits in the long term. Try to use less than 30% of your available credit so you can show you can pay off your debts. Also, avoid closing an account just because you are finished paying it off; this can negatively affect your overall credit score.
Keep Your Balance Low
In addition to cleaning up your credit score, you need to understand your use case thoroughly before approaching a lender. As a small business, figuring out exactly how much money you need and for what purpose can help lenders better assess your application. Try to be as specific as possible — build out a budget for the funds you’d receive from a loan and justify the reason for the funding. You may consider
hiring an accountant to help you prepare an income statement, balance sheet, and statement of cash flows to present to a lender.
How Much Do You Need?
- How does your business make money?
- What are the necessary costs?
- Is your business profitable?
If you understand your credit score and how you will utilize the additional funding, you’ll have a much stronger case for receiving the funds you are applying for. So, before you use, ask yourself these three critical questions:
If a traditional loan isn’t what you’re looking for, you may want to consider an alternative lender. Instead of a loan, alternative funding like merchant cash advances is a method of financing for small businesses that have daily bank deposits. Think of them like transactions — MCAs are repaid daily or weekly and provide businesses with immediate working cash for business needs like purchasing equipment, paying bills and taxes, or covering operating expenses.
Traditional loans depend heavily on a business’ credit score. Unfortunately, the state of the economy has led many small businesses to turn to merchant cash advances to maintain a smooth business operation. An alternative financing company, like Lendr, eliminates the hassle of dealing with loan payment books and third-party lenders who may not fully understand your business needs. Instead, qualifications for Lendr clients focus on your future sales, and a good credit score is not necessary for obtaining a cash advance.
Choosing an Alternative Lender
MCAs can be obtained very quickly. Typically, businesses will receive the requested amount of funding in about 2-5 business days, and there is no heavy paperwork to slow down the process. Lenders examine your business’ daily credit card receipts to determine your ability to repay the money and will likely ask for your bank statements and transaction receipts.
Repayment schedules are based on a fixed percentage of your total sales. MCA financing makes it simpler for small businesses to pay back their funds by giving owners more flexibility to manage a lag in business.
Repayment is a fixed percentage.
Whether you choose to pursue a traditional loan or an alternative financing option, you must look at your business as a whole to identify which option is best suited for your needs.
In a funding offer, you’ll receive numbers for your interest rate and an annual percentage rate along with your capital. Both of these numbers are important to consider because they ultimately will determine how much you owe back and whether or not you’re applying for the right loan. For example, a traditional small business loan with a low-interest rate might have a higher annual percentage rate than a small business loan with a higher interest rate.
These numbers will fluctuate depending on what financing option you choose. For example, an MCA can come with an extremely high APR, sometimes in the triple digits, and the more successful your business is, the higher your APR will be on your cash advance.