Financing is the lifeblood of small business, and the more you know about what lenders are looking for from borrowers, the better your chances of securing financing when you need it.
Let's consider five factors that can have considerable impact on your chances of getting the right financing at the right time.
1. Credit Scores
You credit score is often the most important factor when it comes to qualifying for a small business loan.
Borrowers with good credit scores have a wider range of choices, with terms more favorable to long-term success.
To qualify for the best financing for your business, strong personal credit scores are generally a must, but did you know that your small business has a business credit score as well? Building up your business credit score will help legitimize your business in the eyes of banks and lenders, simplify your taxes, and open doors to trusting relationships with vendors and suppliers.
2. Cash Flow
Cash flow is defined as the total amount of money coming into and going out of your business. Lenders are not only interested in how much money you're making, they also want to see (a) how you reinvest it back into your business, and (b) if you're able to maintain cash reserves for a rainy day, versus spending it as soon as it comes in.
When applying for a commercial loan, banks usually want to see documentation for at least three months' worth of your operating expenses. These should include any and all loan payments. If you're new to business, prepare to show all of the statements you have available, because the more information you can share, the better the likelihood of getting a loan.
3. Time in Business
Traditional lenders keep a close eye on these numbers, and place a high value on the length of time your business has been up and running. It differs according to lender, but the minimum sweet spot for both traditional and alternative lending is usually around a year. Some alternative lenders require as little as six months, but less stringent requirements usually come at a cost—you'll want to make sure you're able to repay the loan quickly, otherwise the higher interest rates may hurt your business' cash flow.
Collateral can include deposits on a merchant processing or business bank account (a good option for new business owners), home equity, and business-owned equipment. Collateral is a strong motivator for paying your bills on time, but think long and hard before considering it an option. If you can't repay the loan, the bank will take your assets to make up for its loss.
5. Social Media
Social media can be an excellent tool for reaching customers and establishing a brand, but the role it can play in obtaining financing isn't always as obvious.
Although many banks have yet to consider social media a factor for the financial success of your business, a number of credit unions and alternative lenders like Kabbage and LendUp are looking to social media to see how favorably a business is viewed online, whether it's trusted by its customers, and the extent to which it's considered an authority by both customers and peers.
Winston Rowe & Associates is a national advisory and due diligence firm specializing in commercial real estate financing. They can be reached at 248-246-2243 or visit them online at http://www.winstonrowe.com
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