As your business grows you may have the need for additional funding to support increasing volume of sales, and other activities. With the emergence alternative financing business owners have more choices than ever like online lending, crowdfunding, merchant cash advances, and peer to peer lending however some fundamentals remain the same. Let’s go over some tips on how to prepare your business for financing via traditional or alternative methods.
I. Define Your financing Goals and objectives.
Small business owners should consider only the amount of money they really need and have a realistic chance of getting approved. For example, if your annual profits are $200,000, you may not want to request $10 million in funding unless you have a high personal net worth even then I wouldn’t recommend it.
Also determine if funding needs are short-term or long-term. What type and amount of payments works for you?
II. Assess your current financial condition and determine how financing helps to achieve your business/operational goals.
Lenders want to know if you have the ability to repay the loan so it’s important to show how financing will have a direct positive impact on your revenues. Are you covering your operational expenses at current revenue levels? Before you agree to a loan, make sure that your cash flow works with the proposed payment schedule. What will you do with the money and what will the results be? For instance, are you buying inventory today that will substantially increase your revenues in the next 90 days?
III. Develop customer acquisition strategies or a marketing plan for your products/services.
If you are pursuing traditional bank financing, you will most likely have to submit a business plan as part of the loan application. Banks want to know as much about a business’ future plans as it can before it trusts the business with its money. Even with alternative financing options you want to have a marketing plan developed showing your client acquisition strategy at a minimum.
IV. Check Your Personal Credit Score
Lenders will determine your creditworthiness by pulling your credit report and credit score. It’s a good idea to know your personal credit score prior to applying for a loan. Many traditional banks will require a personal guarantee for a business loan if you do not already have an established business credit profile. Even alternative online lenders will check your credit score and determine your interest rate accordingly. If you need to clean up your credit report you can start by getting a free copy at annualcreditreport.com and check for any errors, then dispute incorrect information.
V. Build a Strong Business Credit Profile
Your business credit profile includes general information about your business like your address and your industry as well as information about the credit relationships you have with your suppliers. Your payment history with any current business loans and business credit cards will also be in your profile.
Here are some preliminary steps to building a strong business credit profile:
a. Get at Dunn & Bradstreet Number
b. Review business credit profile at Dunn & Bradsheet, Equifax and Experian
c. Establish Trade Accounts with your Suppliers
d. Pay bills on time or early
For more tips and assistance with preparing for business funding contact us today for a strategy session.