Small Business Lending: Are You Ready for a Loan?

I have a consultant friend who helps struggling Main Street businesses get back on their feet. Yesterday he and I were talking about the current state of small business in general and all the changes that have impacted how small business owners find the capital they need to keep their business thriving. As you might expect, thriving and growing are synonymous for most businesses.

We both agreed the landscape is different today than it was at the beginning of the century. With that in mind, these three questions bubbled to the top of our conversation:

1. Is my business ready to take the next step?

I don’t’ know what that next step is for your business, but part of the answer will likely include an honest evaluation of where you really are. Is your business losing money? Do you have a strong business plan? Is a sound marketing approach in place? If you were able to get a small business loan, do you know what you would do with it?

I grew up in the family business. And like every business, my dad experienced good times and bad. Looking back, I’m sure he would even tell you he made mistakes that made running his business harder than it needed to be. That said; he was really good at differentiating between wants and needs. He felt borrowed capital needed to provide a positive ROI or increase the value of his business. Borrowing to build a new warehouse for example was a good use of borrowed funds; he bought his inventory on 30-day terms from his suppliers, and paid cash for almost everything else.

Stepping back and taking a look at your business and why you need a small business loan is the first step. Will the borrowed capital help you take the next step or increase the value of your business, or is simply a last-ditch effort to stave off the wolves?

2. Do I understand my options and which best fit my needs?

We both agreed the world of small business finance is a lot different than it was just a few short years ago. In fact, things have changed enough we both felt it required small business owners to be more finance savvy. Although small business owners might not need to be financing experts to run a business, it’s important they become experts in how to keep their businesses financed.

A big concern for most small business owners is making sure the financing they are seeking is something that will best meet the need. For example, it’s common sense that you wouldn’t use a 30-year mortgage to purchase a car. Short-term financing needs like buying inventory, ramping up with staff to fulfill a new contract, or purchasing office equipment are very different than the financing require for purchasing a new warehouse, buying heavy equipment, or other long-term financing need. While a five- or 10-year term loan might be a good idea for one, there are likely other options that would be better suited to the other. What’s more, looking for the wrong type of loan to fit your business need could potentially cost more than it should and result in a denied loan application.

3. Do I understand my current credit situation?

Small business owners are evaluated on both their personal credit score and their business credit profile.

Although different lenders have different credit thresholds, below which they will not go, many lenders look at your personal credit score as the first go-no-go metric. For example, a personal credit score below 680 will likely result in a rejected application at the bank and a score below 650 will make getting an SBA loan nearly impossible. Online lenders will work with borrowers that have lower personal credit scores provided other criteria are in place, so it’s important to understand where you stand before you apply for a business loan.

Answering these three questions will help you determine whether or not a small business loan will increase profits or add value to your business. What’s more, being able to answer these questions with a loan officer will likely put your application on the top of the pile—particularly if the other loan applications can’t.