With the exception of those few entrepreneurs who might acquire capital by offering equity to an investor (think sexy high-tech companies), many small business owners rely on cash flow or borrowed funds to fuel growth. However, even the right loan at the wrong time can overburden a fledgling enterprise and become the wrong loan.
With that in mind, it’s important to evaluate your current situation to determine if a small business loan is a good idea. Here are three questions to ask that can help you decide if the timing is right:
Is my business ready?
The answer will require an honest evaluation of your current situation. Is my business healthy? Are my revenues growing? What does my credit profile look like? Do I have a sound business plan for expansion? Do I know what I would do with a loan to facilitate growth?I spoke with an entrepreneur a few years ago who was trying to get his young company off the ground. He was in the idea stage, so he had no track record, no revenue, no business credit profile, and his personal credit wasn’t good. He did have a solid business plan and a well-conceived marketing plan, and knew what he would do with the capital—but that’s not enough to qualify for a loan. So he was frustrated that lenders weren’t interested in financing his venture.Like many entrepreneurs, he wanted to ramp up quickly and see the vision he had for his company become a reality now, instead of three or four years from now. I suggested some things he could do to better position his business to qualify for a business loan down the road. He needed a year or two under his belt, and to take steps to build a business credit profile and improve his credit score.Neither he, nor his business, were ready for a small business loan.
Do I understand the current lender landscape?
The world of small business finance is very different than it was just a few years ago. There is no one-size-fits-all business loan, and small business owners need to be savvier about potential options.One challenge is making sure the financing you’re looking for will be the best to meet your needs as well as something you’ll likely be able to qualify for. To make the determination of why you need a loan, you’ll want to dive deeper than simply saying: “to facilitate growth.” Are you looking for financing to fill a short-term need, expand a warehouse, buy a big piece of equipment, or meet some other long-term need? Searching for the wrong loan could potentially waste time and cost more money in the long run. A traditional term loan at the bank is a good option for some purposes, but there are other options depending upon your need—and your ability to qualify.A handy reference guide is available at BusinessLoans.com that identifies several loan options, qualifying criteria, and other requirements that might help you narrow down your search.
Do I understand my current credit profile?
Although this could be included in the first question, it’s important enough to dig a little deeper. While different lenders have different credit thresholds, your credit profile directly impacts your ability to get a loan as well as your potential options. While some lenders will work with borrowers with a less-than-perfect credit profile, it’s important to know where you are before you start looking.A good place to start is learning what the major credit reporting bureaus know about you. The bureaus want to make sure the information they have is accurate and up to date, and at least as far as your personal credit report is concerned, there are several options available to get a free look at where you stand. The three major personal credit bureaus are Experian, Equifax, and TransUnion.It’s also important to ensure your business credit profile is accurate. If you have a business, you have a business credit profile. Dunn & Bradstreet, Experian, and Equifax are the three biggest business credit reporting bureaus. Some of the information they report about your business is part of the public record and is sometimes incomplete. Make sure they have the right information regarding your business, or potential lenders could be making decisions about you based upon an incomplete or inaccurate story. For example, the wrong SIC (Standard Industry Classification) code could put your business in a higher-risk category and make qualifying for a loan more difficult.
The answers to these questions will help you determine if you and your business are ready for a loan as well as whether or not you’ll qualify. What’s more, being able to answer these questions may even put your application on the top of the pile.