23 Jun When is the Best Time to Get a Small Business Loan?
Do you want to know a situation small business loan providers run into often? It’s one we absolutely hate. Getting a call from somebody we can’t help. It’s not the time spent that is tragic. (Though, obviously, we’d rather spend time helping you get financing than the alternative…) The fact is, anyone with a soul hates having to tell someone they can’t provide a solution. Now, here’s the worst part…
Would Arranging Business Financing Earlier Have Helped?
Many business owners avoid debt as much as possible. That’s a great philosophy. Sometimes though, business owners wait far too long. Avoiding business debt can backfire sometimes.…virtually every day……we talk to folks to waited until they were desperate for funds before looking into small business financing.
Often, a business owner realizes that he or she is in danger of bankruptcy without an immediate cash infusion. Too often, by that time, it’s too late. Do you want to know why?
Small Business Funding is Easier to Get Before You Need It
There are some very important factors when you take out a business loan.
These factors will influence:
- Whether or not you will qualify
- The length of time (months or years) you can borrow money for
- The interest rates you will pay for business financing
A lot of folks shopping for business financing aren’t quite sure what lenders are looking for.
Two factors that have a huge impact are:
- Your credit (personal and/or business)
- Your average bank balances
Let’s go over these…
How Does Your Credit Impact Business Lending?
If you keep your credit score above 700, your rates and the programs you qualify for will be much better than if you had poor credit.
It might surprise you how large the difference is.
Consider two business owners with strong businesses.
Imagine both have $500,000 in annual revenues and strong bank balances.
Both are shopping for a $50,000 business loan.
The only difference between these two business owners:
One has a 750 credit score, while the other has a FICO of 550.
The business owner with 750 credit could likely qualify for a 5-year term loan with interest rates of 10% or lower. At a 10% interest rate, that’s a payment of $1,062 monthly.
A business owner with 550 credit would not qualify for that same loan. More likely, the only financing that business owners could be approved for is a daily payment product. The average daily payment product lasts for 9 months at a “factor rate” of around 1.3.
Borrowing $50,000 over 9 months equates to a total payback of $65,000.
While our friend with 750 credit has a monthly payment of $1,062, with 550 credit that payback looks like $7,222 monthly.
Even worse, if computed as an interest rate, it comes out to more than 75%.
Both the interest rates and monthly payments with bad credit can easily be 7 times what they would be with good credit.
Unfortunately, when business owners don’t borrow money before funds run thin, a few missed payments can quickly destroy a credit score.
How Do Average Bank Balances Impact Business Loans?
We just examined bad credit versus good credit.
Now, let’s look at the business owner with a 750 credit score.
Imagine instead of having healthy bank balances, his account was frequently overdrawn and had average balances under $1,000.
Lenders virtually always request copies of bank statements to assess whether you can afford payments on a loan you are asking for.
The type of providers that offer loans at 10% interest rates cares tremendously about this.
In order to offer loans at reasonable rates, it has to be extremely likely that the loan will be repaid.
Did you know…
Even with a high credit score, a business owner with poor average bank balances will likely only qualify for the same loan as a business owner with bad credit?
Far too many business owners wait until it is too late to make sure they have adequate working capital. Many small businesses end up either not being approved for financing or paying much higher rates than they should be. Often, this problem can be avoided ahead of time by making sure to borrow business funds before you need them.