You’ve reached a critical point, and you need financing for your business.
Maybe you’re a seasonal business owner who needs funds on hand to get through the slower months. Maybe your product was featured on a major blog, demand skyrocketed, and you need cash to keep pace with orders. Or maybe the heating system in your brick-and-mortar store is on the fritz and you need it fixed to keep shoppers comfortable while they browse.
Whatever your reason, there are clear actions to take once you realize you need a small-business loan.
1. Crunch the numbers.
You might be tempted to aim for the biggest loan amount possible, thinking it’s best to have lots of spare cash on hand. But you must be prudent about selecting the appropriate loan amount. You have to address your business need, but you also need a feasible way to to repay your lender.
Settling upon the correct loan amount is easier when you consider your debt-service coverage ratio (DSCR). The DSCR calculation reveals how easy it will be for you to meet your monthly or weekly loan payments, given your average cash flow at present. Keep adjusting the potential loan amount until you find a zone where repayments won’t put a financial strain on your company.
It’s also useful to complete a loan-performance analysis. This enables you to see how much revenue growth you’ll need for your loan to be a worthwhile investment. Knowing the amount you’ll need to generate to meet current obligations plus repay your loan might be all you need to keep you from overextending yourself.
2. Find the lender that best fits your needs.
Today’s marketplace offers a number different routes. Traditional banks often provide the lowest rates, so they’re a great place to start your search. But there’s a flip side: Banks require a highly involved loan-application process and require a good deal of documentation. The process can take months, and many small-business owners ultimately are denied. If you don’t have excellent credit or you’re just starting out, you might not be a viable candidate for a bank loan.
The Small Business Administration (SBA) offers loan programs designed specifically for (you guessed it) small-business owners. While the interest rates are slightly higher than the big banks and the application requirements are still fairly stringent, the SBA provides a number of loan options. A small-business owner with a good credit score may find something that works for her or him.
If neither banks nor the SBA fits your needs, online lenders may be your best option. Hundreds of loan products exist, with tailored term loans, invoice financing and business lines of credit. Each lender has different requirements and its own application process. It’s likely there’s a loan product out there that matches you and your business.
Related: SBA Loans: A Primer
3. Get your documents together.
Any lender will need to see some degree of background information on you and your company before making a decision.
The good news is you should have most of this information on hand as part of the day-to-day details you need to run your business. Still, it can be daunting to compile all the data in one place and prepare to share it with someone outside your company.
If you need help organizing this information, consider turning to your accountant for assistance. It’s his or her business to be well-versed in preparing financial statements and documents. Your tax professional can help keep you on track as you prepare your application package.
4. Go for it!
Now there’s only one thing left to do: Apply!
If you’re approved for a loan, make sure you read all the fine print and fully understand the terms before you execute any agreement.
- Are you aware of all the fees?
- Are you sure you’ve found the loan with the lowest interest rate?
- Have you found the type of financing that makes the most sense for your current business needs?
- Will you have the funds to pay back your loan on time and in full?
If the answer to all of these questions is yes, then congratulations! You’ve done your homework and are ready to confidently sign the financing paperwork.