The 2 Key Questions to Ask When Applying for Small Business Financing
Even when times are good, making the decision to borrow money to expand your business is not a one that should to be taken lightly. Overall, the U.S. economy is performing well, and optimism among small business owners is running high, according to a new CNBC/SurveyMonkey Small Business Survey.
The CNBC study found that 46 percent of respondents believe that President Trump’s tax cuts will have a positive effect on their businesses. That is up from 38 percent in the fourth quarter. Further, half of small business owners now expect to see tax cuts in 2018. Meanwhile, fuel prices remain low, and the stock market has been running high. With an atmosphere that is fertile for small business borrowing, small business owners should consider these questions before borrowing money.
Before Applying for Small Business Financing, there are two important questions to ask.
Why Do You Need the Funding?
Your first step is determining what you want to accomplish with the funding. Different financial options are available depending on the use of the money. For instance, an equipment loan is appropriate if your company needs to add machinery. But if you are starting from the ground up in building a business, an SBA loan might be the best option because lenders are more willing to take risks when the government backs the loans against default.
Use of the funds will impact the payback period and the interest rates. If you are borrowing to cover a short-term cash crunch and need the money quickly, you might have to get the funding from an alternative lender, such as a merchant cash advance company (MCA). While a non-bank lender can provide cash in a day or two, the payback period is relatively short and the interest rates are going to be high – more than 20 percent in most cases.
What Are The Terms?
Startup businesses may have fewer choices. After all, there is no track record of success and lenders are primarily concerned with whether or not the loan will be paid back. Anyone applying for small business financing who has little credit history or a poor record of repaying debt will likely have a difficult time securing financing. That is one of the reasons why many businesses start off with self-funding and the investment of family and friends.
Companies that have established some creditworthiness are going to have more options to choose from. If your business has performed well in the past two years, the cost of capital is apt to be favorable. While the Federal Reserve has incrementally increased interest rates over the past two years, rates are still very good. After all, in the early part of the 2010s, interest percentages were at historic lows.
However, Federal Reserve chief Jerome Powell, who succeeded Janet Yellen in February, expects interest rates to continue increasing gradually through the rest of the year. This is not necessarily bad news; first of all, attractive rates will still be available to creditworthy companies. Secondly, the higher rates make lending more profitable for banks, which are usually going to offer the best rates and terms.
According to the most recent Biz2Credit Small Business Lending Index (January 2018 figures), big banks are approving more than a quarter of the funding requests they receive – a post-recession high. Community banks and regional banks are approving almost half (49.1 percent) of their small business funding applications.
Use the internet to research the best deal. Gone are the days when you have to go from bank to bank in order to get information. In fact, most people go online to search for funding options at night and during weekends — often by using their smart phones. It could not be easier.
Once you have answered the two questions above and determined the best options, it is time to apply for funding. Be sure to fill out all the questions on the application and provide the necessary documentation: tax filings, P&L statements and other information required by the lender. Incomplete applications are the most frequent cause of small business loan rejections. Work with your accountant to make sure all the documents are in order so that you are ready to apply. Having everything ready will ensure that the application process goes more smoothly.