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The Pros and Cons of Small Business Loans

Cashflow can be a challenging detail to manage in your business, which is why it can be helpful to have credit cards and/or a line of credit available to get you through the lean months. The way you structure the credit should depend on the needs of your company and the financing options that are available. For example, small business loans might work for some people, but others prefer to use credit cards.

Small Business Loans: Getting Started and Business Growth

There are two points when a small business loan can be quite valuable to your business:

  • Getting Started: When you are trying to get the company off the ground, cash is needed to help you get things rolling. Some people have personal funds that are put into the business, but this money will only get you so far. Not only do you need money for marketing, website design, inventory, and more, but you need to be sure there is enough cash to keep you going in the beginning. Small business loans can be used upfront so that you can get your company launched. The bank that provides the loan will use your personal credit score and reputation in determining the amount of money that is available and the terms of the loan.
  • Future Growth: If you have an established business, you might face cashflow issues when it is time to grow. Expansion requires money, which can make it a tricky situation to navigate if you don’t have the cash in the bank. Future growth is much easier if you have a loan to tap into for the funds that are needed. This money can be used for business development, marketing, inventory expansion, and more.

Sometimes, the loan is structured as a set dollar amount that is paid to your business, and then you can use the money as you see fit. Another common option is to use a small business line of credit. This solution works similar to a credit card with a balance that can go up and down over time. The difference is that cash is available to ensure that you have the money when it’s needed.

What Do Lenders Want?

Small business loans aren’t automatically handed out to every person who has a business idea. When you talk to the bank, they will determine the risk of the loan and how much money will be available. The goal is to ensure that you will be able to pay the loan back in full. So, the lenders will be looking for a few key points to ensure that you are a safe and reliable customer.

Since the primary concern of the lender is that the loan is paid back in full, they are going to look at your personal credit history and track record. If you want to qualify for a business loan, then it is helpful to have a good personal credit score to show that you have a track record of paying back the money.

Additionally, the bank will ask for your business plan and other details about your company. You might need to show how the money will be coming in from customers, and potential details that you should anticipate in the future.

Each lender will set the terms of the loan based on your risk and qualifications, which means that there are various possibilities for interest rates, loan caps, and repayment schedules. If you are a high-risk borrower, then it is likely that you will have a high interest rate and a lower amount for the loan. One option is to shop around with various banks and credit unions to find the best terms that you can qualify for.

Also, don’t feel disheartened if one lender rejects your application. If you receive a rejection, then talk to the lender to learn why the loan wasn’t approved. This information can be valuable so you can change your future applications to increase the likelihood that you will be approved. Some lenders will let you reapply after the concern has been fixed. Or, you can use the feedback to improve your application with other lenders.

Paperwork to Provide with Your Business Loan Application

What are the specific requirements that will be requested by your lender? You need to be prepared with paperwork and other information when you are completing the loan application. These are some of the most common requirements that lenders might request:

  • Purpose of the loan
  • Desired amount for the loan
  • Personal credit score
  • Business credit score
  • Business plan
  • Time in business
  • Type of entity
  • Industry
  • Business permits and licenses
  • Bank statements
  • Accounting reports
  • Tax returns (both personal and business returns)
  • Rent or lease agreements
  • Business ownership information
  • Disclosure of current debt
  • Proof of collateral
  • Legal agreements or contracts currently in place

The best thing you can do is put yourself in the lender’s shoes. What are they looking for? How can you show that you are a reliable borrower? The more information you provide, the better you can show that you are a great customer for their lending business.

Pros and Cons of Small Business Loans

Is a small business loan the right solution for your situation? Here are a few pros and cons to help you decide if you should move forward with the loan:

  • Pro – Additional Capital: What could you do if you had access to additional capital for your business? This financing can be essential to help you stay afloat during the lean months and build your business when things are going well. Many business owners have trouble with cash flow, which is why a loan or line of credit can be essential in the hard times. The money can be used for business costs as needed.
  • Con – Interest Accrual: Whenever you are borrowing money, it is going to cost you in the form of interest expenses. The lender is offering the money with the purpose of making a profit on the deal. Interest expenses aren’t always a bad thing if you can leverage the cash to help your business grow. But if you aren’t careful with money management, then these interest costs could start eating into your profit margins.
  • Pro – Cashflow Management: It is common for small businesses to have ups and downs. For example, companies in the retail business refer to “Black Friday” as the turning point of the year when the real profits start to flow. Then, sales often start to slow down in January. If you are worried about cash flow management in the future, then a business loan can give you the peace of mind for those difficult months.
  • Con – Money Management: Just because money is available through your small business loan, don’t let that be a reason that you make poor money management decisions. Some business owners find that they are more risky with their money because they have a credit line to tap into. If you put your cash into a questionable business investment that falls through, then you might find yourself between a rock and a hard place when you can’t get access to the cash that is needed for paying the bills.
  • Pro – Build Business Credit: Did you know that your business can build a credit history, just like your personal credit score? Borrowing money through your business can help you establish a reputation that opens up options for more loans in the future when needed. Even if you don’t need access to the cash right now, it is smart to build your business credit so you are ready with the money when things get lean during your slower months.

Can You Get a Loan if You Have Bad Credit?

Just because you have no credit history or a bad credit score, it doesn’t mean that you won’t be able to qualify for a loan. But it might be necessary to offer collateral – giving the bank something to fall back on if you miss the payments.

Collateral can be offered in the form of property. For example, if you own an office building and hold equity because the mortgage has been paid down, then the building could be offered as collateral. You need to know the consequence if the loan isn’t repaid. Often, the lender will place a lien on the building, so the repayment will occur when the building is sold in the future.

Also, consider alternative lenders if you can’t get a loan through the bank. Sometimes, angel investors are willing to put up the money for a share in the business profits. Connect into some of the business networking groups in your area to see if you can find people who are interested in investing.

Manage Your Business Finances

Staying ahead of your financial tracking and management is key to protect your cash flow and help you position for a small business loan if needed. When you have accurate bookkeeping and accounting records, it shows the bank that you are responsible with your money, which increases the likelihood that they will be willing to lend the cash to you.

Our team at Easier Accounting is here to help with your financial management. If you are interested in learning more about the bookkeeping and accounting services that are offered, then you are invited to contact us today: (888) 620-0770.

Factors to Consider if You Need a Small Business Loan

Are you preparing to launch a start-up? Or do you need some extra money to help with the cash flow of your existing company? There are many reasons why business owners and entrepreneurs might be thinking about applying for a business loan. Before you run to the bank to open a line of credit, it is important that you talk to your accounting team to learn more about financial strategies that can be used in this situation.

Cash Flow for Business Operations

It is important to be sure that you have the cash flow to maintain daily operations for the company, which often means that you need to front the cash to pay for inventory and other expenses. But, you need to be careful to ensure that you have enough money to carry the company until the receivables come in.

If you know the numbers, then the risk is minimal to front this money. So, you should maintain close communication with your accountant to ensure that you can pay off the loan when the extra cash is available.

But, mistakes can be made and cause your company to be strapped in debt. These debt payments could make it harder to keep up with cash flow, eventually leading to the demise of the business.

Making Debt Useful to Grow Your Business

There is nothing wrong with using debt to grow your company. You just need to be sure that you are working with experienced financial professionals to ensure the long-term success of your strategy. Once these funds are secured, then you can use the money to boost inventory or focus on business development. Eventually, the risk could pay off with a big return on your investment.

There is no doubt that it takes money to earn money. Some business owners have a reserve of cash that can be used to get the company off the ground. Other times, it might be necessary to find angel investors or to get the financing that is needed from a lender.

How to Get a Small Business Loan

Don’t expect to walk into a bank and have easy access to money for a business loan. You need to do your homework and make sure that you are prepared when you meet with the lender. This meeting is essential to help you secure the funding that is needed. But, it can be a challenge for some people to get the approvals that are necessary for a loan or line of credit.

Securing a business loan is even harder if you haven’t been in business for many years or you don’t have the assets to use as collateral. The lender wants to see that there is a fallback option if you default on the loan. They are looking at the risk of lending the money to you.

Here are a few things that you can do to win over the lender and secure the loan that you need:

  • Provide the Lender What They Want: The lender will provide the money, with the caveat that it will be paid back in full with interest. The biggest worry is that you will be unable to pay back the loan. So, the lender will assess your personal financial history, to see if you have a good credit score and track record. Additionally, they will request information about the business plan and the anticipated outcomes as you work through the anticipated challenges of owning a small business. You need to be prepared with details and documents that will show why you can succeed when other businesses in the same industry have failed.
  • Provide the Paperwork: Don’t show up to your meeting empty-handed. Most lenders will be looking for specific documents, and they might even provide a list of requested information in advance. For example, you should bring business tax returns, profit and loss reports, proof of sales, your business plan, bank statements, or anything else that will help to show the financial picture of your company.
  • Choose the Right Lender: Instead of walking into a random bank down the street, do your homework to find a lender with a good reputation. If possible, it is best to find a financial institution that often works with small businesses and entrepreneurs. What types of loans does the lender typically offer? Do they have a good reputation among their customers? Choosing the right company can increase the likelihood that you can secure the money that you need.
  • Build Business Credit: If you are applying for a personal loan, then the lender will run your credit score to determine the risk of lending to you. In the same way, banks want to know more about your business credit score. They will look at assets and credit history to see if you have built a strong financial reputation for the company. Without this credit history, it can be hard to get approval for the loan. The best way that you can build your business credit is by securing smaller lines of credit through suppliers or investors. Then, you can strengthen your credit rating and buy assets that can be used to back up the loan money.

If you have questions about the process of getting a business loan, it can be helpful to talk to your small business accountant for advice and information. You accountant can help you prepare the documentation that is needed. Sometimes, they can even provide recommendations about good lenders to work with.

Choosing a Bank for a Small Business Loan

As mentioned above, choosing the right lender is a critical step to help you secure the loan that you need. By selecting a reputable lender, you can rest assured to know that you won’t get burned by the loan. Find someone who can offer fair interest rates and reasonable payback terms.

The most important factor is to make sure that you choose a bank that is friendly to small businesses. Here are a few options that you might consider:

  • Local Banks: Applying for a loan with a large corporate bank means that you might get lost in the shuffle. Instead, look for small financial companies that often work with local businesses. There is a Small Business Lending Fund that can be used by community banks to fund loans for small companies.
  • Talk to Other Small Businesses: Do you know any other small business owners in the area? Often, start-ups and entrepreneurs are well-connected with other people in the same situation. Ask your network to find out where they secured financing, and they will likely provide referrals for you to use.
  • Small Business Administration Secured Loans: Consider the option to apply for loans that are secured by the Small Business Administration (SBA) in the United States. These lenders will be listed as either preferred or certified by the SBA. The loan doesn’t come directly from the SBA. Instead, the lenders can secure financing through the SBA to provide loans for small businesses.

Comparing Your Options

Keep in mind that you don’t have to limit yourself to one financial company. Instead, it can be beneficial to apply for several loans so that you can compare your options. There are many lenders willing to provide the money that you need, and it can be to your benefit to compare the offerings so that you can find the best terms for your needs.

Be selective about the loans that you choose because you need to be sure that the financing will support the long-term results for your business. If the repayment terms are too difficult to meet, then you might consider looking for other options that are available.

Using the Money Wisely

Once the loan has been approved and you have secured the money that you need, work with your accountant to make sure that the money is used in the right way. Too often, business owners spend the loan money too quickly on things that won’t necessarily contribute to the future growth of the company. Then, they are stuck with the same revenue and higher bills that need to be paid each month.

Your accountant and other financial professionals can help you assess the anticipated Return on Investment for the money that you will be spending. Be selective to dedicate the money to business activities that will help to boost your revenue, providing the cash flow that you need to pay back the loan.

Are you looking for financial advice catered to the needs of your company? Then you need to talk to our team here at Easier Accounting. We specialize in small business accounting, and our goal is to provide the financial strategies that will help your business grow. We can cater your accounting services to match the needs of your company.

We are always happy to answer your questions and help with anything that you need. Call us to learn more about the ways that we can help your small business. We will gladly schedule an appointment to discuss the services that we offer: (888) 620-0770