Is There an Optimal Time to Apply for a Business Loan?
Understanding what is the best time to apply for a business loan is dependent on a number of factors. Many business owners believe that the best time to apply for a business loan is when there is financial need. However, in most cases the moment of financial need for a business is also a time of financial distress for a business. Organizing and planning for capital need when your company is stable and not in a desperate financial pinch will likely result in a better borrowing outcome
Securing adequate capital funding is the prime need of businesses. Business loans are also made easily available to help small businesses grow and boost the economy. The reports from the National Small Business Association further corroborate the fact that positive steps are taken to increase lending to small business owners over the past few years.
The report from NSBA points out that nearly three-quarters of small businesses could secure adequate business financing by the end of 2017. While lending to small businesses has seen a hike, it can also be quite challenging at times to get the right funding at the right time. If you are a small business and looking to get a loan then here is a definitive guide on how you can access loans, the various funding options and you would also get an idea as to what is the best time to apply for a business loan online.
The Type Of Small Business Loan Needed
The NSBA report indicates that providing adequate funding is critical to driving the growth of small businesses and their employees. Facilitating access to funds to small business is also significant for the overall growth of the economy. Given the need to support small businesses, lending agencies have come up with all kinds of small business loan products for just about every type of business needs one can possibly imagine. Whether a small business is looking to rent or buy office space or need funding to buy more inventory and supplies, get some equipment or simply undertake expansion plans, there are options available for small business funding. Below is a list of factors to take into account when assessing each small business loan type. With these pointers, you can figure out the best funding method to get the loan you need for your business requirement.
- How much business funding do you need?
- How quickly and conveniently can you secure access to the funds?
- What are the necessary documents required to get the funding?
- What are the minimum eligibility requirements to qualify for a loan that you are seeking?
- How much will the business funding cost you?
- What are the repayment terms?
After evaluating the answers to the above questions, evaluation of the type of business loan you need becomes easy. You will get an idea of things you need to do in order to get the funding you want for your business.
Top Small Business Loan Options
Before seeking business financing, understand the many types of loans available to you. Here is a look at some of the top small business loan products:
Best Time to Apply For a Business Loan: It Depends on Loan Type
Term loans – These classic business loans are flexible and can be used for almost anything. Small business borrowers can take such loans to add to their existing working capital base, buying equipment, servicing debts or also to add supplies or machinery. Under this category, a good sum is provided with a fixed term and repayment amount. A borrower has to pay the interest along with the principal amount.
Business lines of credit – Like the credit cards, business lines of credit come with a lot of flexibility and can be accessed anytime that a business owner wants. A borrower is charged interest only for the amount withdrawn and not the entire pre-approved loan amount. A lender can give a loan approval for the revolving credit line with a maximum limit on the amount of money you can borrow. Interest is not charged on the maximum limit. Larger lines of credit can be secured against some kind of collateral and can be used for any of the business requirements. Borrowers can also take unsecured loans without collateral. Be it buying supplies or purchasing equipment or even investing in marketing and managing fluctuations – this business line of credit can be secured with proof of good creditworthiness. Perfect credit scores and credit reports go a long way in helping online lenders determine the risk of lending before providing such revolving lines of credit.
Equipment loans – Small businesses in need of adding machinery to their existing workshop can opt for equipment financing and ease the cost burden associated with buying a large piece of machinery or equipment. When taking out such loans, businesses may have to make a down payment of 20% but some loans are also provided without a down payment. In such loan types, the equipment for which loan is sought often serves as the collateral for the loan. Make timely monthly payments to traditional banks and lending agencies to qualify for business funding such as these loans easily.
Invoice financing – If your small business administration suffers from serious cash flow issues then it is suggested that you use invoice financing, which is best described as short-term borrowing. With this kind of business financing, one can sell off unpaid invoices to the lender at discounted rates and in turn secure financing. The majority of the amount owed on the invoice will be provided as an upfront payment by the lender but at the same time, an outstanding amount of usually 20% is held back by the lender until the invoice is paid. Borrowers have to pay the fees on a percentage of the invoice along with the factor rate charged on the cash advance.
Merchant cash advances – Small businesses in need of immediate cash can take out a merchant cash advance. Like invoice factoring, a merchant cash advance is not a loan. The borrower can secure access to cash in exchange for a discounted portion of their future sales. The borrower needs to pay the amount of the advance plus fees determined by a factor rate. Repayment of the advance can be made with a portion of the future business credit and debit card sales. You can pay fees either through fixed weekly or daily transfers from the bank account. The factor rate is determined by the creditworthiness and and revenues of the business.
Commercial mortgage loans – If you are planning to buy a real estate or develop an existing property or may just need capital to refinance commercial property such as add to the warehouse or a retail center then take out a commercial mortgage loan.
Franchise loans – Borrowers with a business plan to buy or expand an existing franchise can put forth a loan application to funding its franchise. The loan amount can be used for paying the standard business opening expenses and other related costs pertaining to the franchise such as marketing fees and so on. Maintaining a good credit history can help you access such loans easily.
SBA Loan Guarantees – The Small Business Administration extends its support and provides resources to small businesses by offering guarantees for bank loans taken out by the small business segment. These SBA-backed loans were created by the agency with the aim to help startups and small businesses fulfill their business needs. These loans are executed by SBA-approved commercial lending agencies. The SBA’s primary lending program reduces the risks to online lenders and credit unions by providing a guarantee for the loans.
Short Term Loans – Small businesses and startups can easily access these loans as they are easy to get than traditional loans and are also processed quickly. These loans can be used for paying salaries to employees, hiring new employees, purchasing supplies or even getting started. With such approved loans, small businesses can have the required working capital in their hand right at the time of their need and they also come with flexible repayment terms. Moreover, fees on such loans can be paid off quickly so the debt does not bother the borrower for years. With the ready funding available, borrowers can fulfill their initial cash flow needs for a short period of time and once the business revenue starts coming and bank statements start reflecting good profits then the loan can be paid back in a quick time.
Best Times To Apply For A Loan
All businesses need to maintain a minimum cash flow to keep their operations running smoothly. Having adequate business capital is the key to stay competitive in an industry. However, there are certain situations and times when you need to apply for a loan to give your business a much-needed boost. If you are anticipating increased demand for your products during the holiday season then you might need additional capital to purchase more supplies so as to meet the demands. Similarly, for businesses whose sales are seasonal then they would have to assess their most profitable business time and apply for a loan before the peak season starts. Hence, it is important for businesses to understand the right time to apply for a loan.
Below are some of the most common situations and in which small business borrowers could reap maximum advantage of availing the above small business financing options.
The Holiday Season – Most businesses often witness an increase in sales and revenues during the holiday season. It can be quite a hectic time to manage the inventory and keep the production process running smoothly before the demand pushes up in the market to optimize the profits. Hence, businesses should invest in promoting their business and push up marketing of their products and services ahead of the holiday season. Without getting the additional financing support in the form of small business loans, paying for the extra expenses can be quite difficult. Hence, it is wise to apply for a business loan prior to the holiday season.
Busy Season – You might be in a business that is seasonal and runs well during peak season but slows down during the offseason. Depending upon the nature of your business industry, it is best to analyze the times when your business witnesses a hike in demand for its products and services and also times when you have a sluggish growth. For accountants, the tax season is quite a busy period. Taking out a business loan can help accountants pay salaries to the additional contract staff that has been hired to get through hectic tax return season.
Food joints and restaurants also see the good influx of customers during the summer season and hence need to support their finances with an additional loan at the time of spring- right before the busy summers start. If you are in a business that makes most of its profits during a particular peak season then you would certainly not want to be low on cash flow right before the busy season. So applying for loans is a good way to pay off the operational and business support costs during the busy seasons. Landscapers can pay for the purchase of landscaping equipment with the help of a loan before the busy spring-summer season starts.
Profitability of business – You can think of taking a loan when your business is on a good growth trajectory and you are assured of good profits in the future too. Profits from the business can help you become a low-risk borrower and also help you clear your debts easy and quickly. You can also effectively use the loan money for the potentially growing segments to double up your revenues.
Launching a New Product or Service – Business with a plan to introduce new products and services can apply for a loan to meet the costs associated with the offering of new services and products. Consider a loan amount that can help you cover all the expenses, right from manufacturing to marketing to development and through to its delivery and customer service. For example, if a small plastic product manufacturer decides to get into the production and delivery business of plastic household utility items than it needs additional working capital to meet the new production requirements, add more employees and also buy new equipment. Hence, it needs to apply for a loan that will cover all financial needs.
Economic Opportunity – The economic situations have a great impact on the way small businesses grow and flourish. It is prudent for businesses to analyze the right opportunities and cash in on the best economic times to seek a business loan for their expansion and development. For instance, an increased thrust on the digitalization drive prompts businesses to make way for digital transactions and launch better tech-friendly tools. Hence, firms sensing an opportunity to bring in more revenues can introduce digital modes of payment services and also offer discounts to customers using these platforms. An increase in the demand for their products and services in the economy leads to a corresponding increase in the need for working capital to meet the market’s demands.
Right Interest Rates from Banks- The general interest rate cycle will also help in deciding the right time to take financing from banks. In a general interest rate reduction trend for last few years provided by Central bank- Federal Reserve- taking loan when the interest rate regime is moving downward will be more favorable for the small businesses. They can borrow larger amount of sum with same or lesser interest burden when interest rates are down.
Slow Season – If you are in a business that is experiencing a lull in sales and annual revenue then getting a business loan can help in many ways. Apply for a business funding option to help you sustain operations through the slow season and help generate a stable financial statement. The loan amount can also be used to make improvements in the business structure to bring in more sales and revenues. You can pay monthly bills with the influx of new business funding or update your inventory or simply redo the interiors for attracting more clients.
How To Choose The Right Type Of Loan At The Right Time
Focus on the loan type or other financing product that best meets your business requirements and can help you meet your business growth needs. Once you have analyzed all the available funding options, take into factors such as the following to decide on the right fit for your needs and also finalize the right time before initiating the funding application process. Here are the factors:
Eligibility requirements – Most lenders require borrowers to maintain a minimum credit score to be able to qualify for a loan. Ensure that you have a strong business credit score and you pay off bills on all your business credit cards in a timely manner to avoid getting a bad credit score. It is also suggested to maintain a good personal credit score and have no personal or business assets mortgaged for loans to fulfill funding needs. This will help you keep clean personal credit history. A borrower needs to repay the loan taken out in a timely manner and adhere to lender repayment terms even when taking out a personal loan.
Choosing the right tenor- Term structure of interest rates is also an important factor to determine the right tenor of the loan. Generally, interest rates on long maturity loans are higher than the short maturity loan. Small businesses should carefully evaluate the tenor of their money requirement and then choose wisely to get the most optimal tenor.
Costs – Calculate the APR, down payment, origination fee, factor rates, underwriting fees and closing costs associated with the loan before proceeding with the loan application. Taking the financing option with the minimum costs involved with the help you to invest profits back into your business and repay the lender as early as possible.
The reputation of the business lender – Do find out about the lender’s reputation by searching for relevant information on past and current customer experiences. Take into account factors such as fees, overall satisfaction, loan terms and resolution of problems pertaining to loan repayment when choosing the lender.
Initiate your small business funding application only after weighing in all the relevant factors and situations. As every small business is different, funding needs are also different and assess everything that prompts you to take additional working capital. Taking the right type of small business loan at the right time can save you a lot of hassle and help you thrive and flourish in the future.