A Guide to Small Business Financing

Life doesn’t ever follow a strict plan, and sometimes you find yourself needing a helping hand. The small business financing industry has grown rapidly over the past years and entrepreneurs have multiple types of business financing options available to choose from. Whether businesses are looking for working capital, to replace equipment or to pay 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 take the time to thoroughly review your company. Loans can be stressful, plain and simple. 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 stage of growth?

Traditional vs. Alternative Funding Options

If you decide your business needs additional financing, make sure you’re aware of and understand all the options available for your business. Take a moment to ask yourself this: does my business truly need financing, and what is the best option 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 off of your credit score, cash flow, and payment history. The application process is also known to take 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.

Planning For a Traditional Loan

There are two big things you need to keep in mind 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:

Check for errors in your report

For both 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 sites like Experian and Credit Karma.

Clean up late payments and tax liens

If you owe federal or state tax liens, get started on a payment plan or try to pay off the entire lien. 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.

Keep your balance low

A great credit score is the result of making good habits in the long-term. Try to use less than 30% of your available credit so you can show you are able to 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.

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.

Before you apply, ask yourself these three important questions:

  1. How does your business make money?

  2. What are the necessary costs?

  3. Is your business profitable?

If you understand your credit score and how you are going to utilize the additional funding, you’ll have a much stronger case for receiving the funds you are applying for.

Choosing an Alternative Lender

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 are 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 and 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 focuses on your future sales and a good credit score is not necessary for obtaining a cash advance.

They’re fast!

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 is a fixed percentage

Repayment schedules are based off of 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.

At Lendr, we work with you to identify the appopriate financing options for your business to get you the working capital you need

Your Business Needs Will Dictate Which Option You Choose

Whether you choose to pursue a traditional loan or an alternative financing option, it’s important you 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. 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.

Luckily for small business owners, there are a multitude of options to choose from if you need to immediately finance your business. Finding the appropriate option takes time and research – you’ll want to thoroughly review all of your finances and bank statements, as well as examine future sales projections prior to applying. At Lendr, we work with you to identify the appropriate financing options for your business to get you the working capital you need.

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