The mere thought of a loan is usually enough to scare someone. The process can be intimidating, requirements are tedious, and it seems that everything is a hassle but with no guaranteed results. The misinformation that surrounds the idea about loans is usually the reason why a small business sees it as an intimidating process. Where in reality, the market and everything about loans have evolved, and the slow and painful processes are not applicable anymore.
As the technologies surrounding businesses are advancing and so are the ways to secure additional funding that is more convenient and easier on the business cash flow. Here are 3 of the biggest myths associated with small business loan programs, and the real meat behind it.
Myth # 1: The Bank Is My Only Lifesaver.
Gone are the days that the treasures are only inside the bank vaults. The market for business loans have grown tremendously, especially that the economy is exhibiting a more modest growth. There are many opportunities for entrepreneurship that the technology is opening, which encourages more ventures to start. The flourishing of the internet paved the way for more entrepreneurs to materialize their ideas, and it also made it easier for them to market.
Going on with this trend made financial services sell like hotcakes. Businessmen have different strategies when it comes to their startups. Some start small and safe while others can tolerate greater risks. It doesn’t matter how small or great one’s risk tolerance is, but one thing’s for sure, someone will always need an additional funding.
Banks are institutions. This connotes a high level of credibility, which makes a business see it as a reliable partner for its financial needs. Most people see that banks are the best option when it comes to funding solutions, but it is not always the case. The reason why most small business owners initially go to the bank is because they don’t know that there are other options. While the advantages of dealing with banks are undeniable like lower interest rates and the opportunity to improve credit score, a borrower should not limit himself by continuing to search until he finds the best option.
The market for business loan programs are expanding. This increases the chance for positive outcomes for both the borrower and the lender. There are different types of small business loans, which tend to be targeted like the ones for small businesses. This makes it easier for a business to always find an alternative, if a bank isn’t accessible. See this list of the best small business loan companies to extend your options.
Myth # 2: Getting an SBA Loan Is the Easiest Way for Me.
Although it specifically caters to small businesses, the U.S. Small Business Administration (SBA) loan system are not essentially the easiest way to secure. Not all businesses who can qualify for a small business loan will be automatically granted with an SBA loan. A small business that is applying for it should meet the following requirements:
- A completely filled up SBA loan application form
- Personal background and financial statement
- Business financial statement
- Ownership and affiliations
- Business certificate or license
- Loan application history
- Updated income tax returns (personal and business)
- Business lease
On top of those requirements, a small business must meet the following universal eligibility (other specifics will depend on how you will personally evaluate):
- Operates for profit
- Be a small business, as defined by the SBA guidelines
- Be engaged in, or proposing a business in, the United States
- Have a reasonable equity investment
- Have already used personal funding assistance (used personal assets) prior to applying
- Be able to demonstrate the intent and the need for funding
- Must have a sound purpose for the funds
- No delinquent or outstanding debt by the US government
Myth # 3: I Only Own and Manage a Small Business, and I Don’t Think I Need To Know the Technicalities Yet.
Being an informed business owner increases the chance of making the best decision. Starting small doesn’t mean you should not widen your knowledge about how loans work because a good credit standing and history is always better than having none at all. Here are the essential financial aspects that you need to know that is relevant with small business loans:
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Equity
The debt-to-equity ratio is the measure of the amount that the borrower had put into his business versus the amount he is asking from the lender. Lenders look at this as the measure of how strong the company is and how likely it can repay the amount.
Essentially, the lower the debt-to-equity ratio, the higher the chances that the lender will approve the loan. Each industry may also have different benchmarks when measuring how strong or how weak a debt-to-equity ratio is. It is also influenced by a number of factors like years of operation, revenue size, and location. It is a must that a small business should know its debt-to-equity ratio prior to applying for a loan for him to gauge how likely he will get approved, so he can make the necessary improvements if possible.
As a business owner, you should improve your equity by building up your assets, which can be in the form of bank savings, machineries and equipment, real estate properties, or even invoices and receivables. Minimal debt can also increase the equity, which is an important factor during difficult times. A strong equity can impact how a business can receive substantial funding.
Equities are not only applicable to larger scale businesses but also to small businesses. Its assets might not equal to its larger counterparts, but maintaining a good debt-to-equity ratio increases the chance of being approved for a loan during adverse times.
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Cash Flows
The majority of the difficulties that business owners encounter is relevant to how they manage their cash flows. Surely, a problem will arise when the cash outflow is greater than the cash inflow. With this, a business cannot sustain its operations for a long period of time. It is important for the elements that contribute to both what flows in and what flows out to be carefully monitored and accounted for.
Cash flow issues usually arise from both unrealistic projections and mismanagement. In projecting cashflows, one must consider the day to day activities in the business operations, and also the possible challenges, difficulties, and needs that needed enough cash leeway. Managing the cash flow well means that one knows what are the business’ regular payment accountabilities like utilities, salaries, supplies, and vendor invoices and when it is due. And in proportion to this, one must also know how much profit the business receives and if it can compensate for all its due payments.
A cash flow must have enough fluidity to support the business’ day to day operations. A strong cash flow management can make it flexible to accommodate additional (but important) liability like repayments for borrowing money. A loan is maximized when it is able to help a business with its needs, and at the same time, it doesn’t interfere too much with the cash flow.
Borrowers must be able to convince a lender of its strong cash flow management capability. For a lender, a strong cash flow projection is an indication of how well the borrower can sustain the payments for the loan. It can be well supported by a robust credit history that shows timely payments from past obligations. In addition, some lenders require a contingency plan just in case the business’ profits cannot sustain the payment dues anymore.
A small business should be able to keep up with a steady cash flow, so nothing can hinder its growth and expansion in the future. This will also prepare it when a strong need for a lending solution arises, which will make it fluid and sustainable during the crisis.
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Working Capital
The working capital is the difference between your business current assets and its current liabilities. Current assets refer to the most liquid, or that is in a form of cash or other easy to liquidate ones. Current liabilities are obligations to fulfill within the year. When you subtract the amount of your current liabilities from the current assets, you will get the amount of your working capital.
A working capital can either be positive or negative. A positive working capital can ensure that your business can operate smoothly within the current year or period. It also serves as the business’ cushion or can be used to repay a loan.
Seasonal businesses must always aim for a more positive working capital to help them get by lenient seasons. This is achievable by saving more during peak seasons.
Having a small business doesn’t mean you should aim for a small working capital either or scrimping on additional investments, which can then impact your equity. It is important to maintain a good balance between your assets and liabilities to achieve a sustainable operation for your business for a long time.
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Collateral
Collaterals are assets of value, which can be used as a form of security to assure the lender that the financial obligation will be repaid completely and on time. Should the obligation be unmet, it should demonstrate a value that can compensate for the amount in question. It can be an asset that your business already has like equipments, machineries, infrastructures, accounts receivables, or inventory. It can also be the business’ owner’s personal assets like his car and home.
In the case of small businesses, it should check with the lender the specifics of what assets can be considered as enough collateral. Most small businesses, however, cannot provide enough collateral for some types of funding solutions like conventional bank loans. But there are a lot of alternative small business loan providers that doesn’t require a collateral for you to avail its services. You may check the small business loan companies that are enlisted in Crowd Reviews.
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Business Administration
This is the process of managing the daily business operations by overseeing the elements that influence it. These elements include inventory, payments, payroll, people management, and product or service delivery. How well you perform your business administration will indicate a certain level of maturity when it comes to handling responsibilities and obligations.
Small business loan providers will put a huge amount of weight of consideration on this business administration skills, in regard to the loan you are applying for.
Character – this doesn’t just pertain to the human aspect of it (the business owner) but is an impression of the trustworthiness and capacity to pay based on the business history in general and its reputation in its industry.
Managerial Skills – this includes the owner’s educational background, expertise, and industry experience. This can be proved through the quality of the feedbacks from character references and his own employees.
To know what clients are saying about the services of their small business loan providers, check out CrowdReviews.com’s reviews of small business loan companies.
John Tovar
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