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The Ultimate Guide to Small Business Funding

Small Business Funding

Everything You Need to Know To Successfully Get Funding for Your Business

If you are a novice to the world of small business funding, you’re going to find yourself with a lot of questions. Today, we are going to answer many of the questions that are likely to be addressed either during, or prior to your loan application process. We hope these answers will help you make the right choice.

 

HOW MUCH CAN I AFFORD TO BORROW?

If you find yourself on the phone with any small business funding broker, no matter who they are, chances are the first question you are going to be asked is, “How much do you need?” The answer is a little more complicated than you’d probably think.

There’s probably an amount you want, amount you need to reach your goals, and the amount you can actually afford to borrow. Which might surprise you. Whatever your need is, you’ll be all set. With funding available up to 3 million!

Wondering how you can determine how much your business can afford to borrow PRIOR to pursuing conversation with a funding company? We’ve got you covered.

Cash Flow / Loan Payment = Debt Service Coverage Ratio (DSCR)

Your DSCR is basically a formula for taking your monthly, or yearly, cash flow, and dividing it by your projected loan payment and any other recurring debt you may have during that time period.

Most small business funders will expect a minimum DSCR of at least 1. For example, if you’re annual cash flow is $50,000 and you’re applying for a loan that will have an annual debt service of say $45,000, and you have an additional annual debt service of $5,000, your formula would look like this:

50,000 / 45,000 + 5,000 = 1.0

In this scenario, you would have exactly the amount of cash flow to pay off all of your debt services for the year. This is, of course, assuming that you inquire NO additional expenses throughout the year. Which is why having additional cash flow would greatly increase your odds of acquiring a quality loan. Most small business funders will look for a 1.15, but if you want to increase your eligibility we recommend you shoot for a 1.35 or better.

Ultimately though, it is a matter of what you are comfortable with. If you want a cushion of at least a 2.0 DSCR to feel safe about unknown expenses that your business could incur, then talk to your broker about getting a loan that will land you somewhere in that general area.

 

WHY USE A SMALL BUSINESS FUNDER RATHER THAN JUST APPLYING TO A BANK?

Well, here’s the thing. 82% of small business loans are denied by banks. Eighty-two percent. Plus, if you are one of the lucky small businesses to actually get approved, securing said loan can take months.

That’s where alternative funding companies come in. Alternative funding companies can provide you with fast cash. They can work with your bad credit score. Alternative funding companies have a slew of available loan options that will get you cash in hand in as little as 48 hours.

 

WHAT ARE THE MOST IMPORTANT FACTORS THAT FUNDERS USE TO DETERMINE YOUR ELIGIBILITY?

Annual Revenue

Naturally, the amount of money your business makes in a calendar year is going to be an important factor here.   Funders are going to want to know that you will be capable of consistently covering your loan payments, along with the rest of your company’s expenses.

Talk about this with your funding broker but any small business funder will typically want to limit your loan amount to less than 15% of your business’s total revenue. This is because it makes lenders feel more confident that you will still be able to make your loan payments even if you incur unexpected expenses.

Average Bank Balance

Speaking of unexpected expenses, these things are inevitable. From inventory issues, building damage or a full blown economic crisis, it’s inevitable that unexpected hard times and expenses can fall upon your business on any given day. If you don’t have money to cover these expenses, you can find yourself falling behind your payments and ultimately get caught in some quicksand you can’t climb out of.

So in order to ensure yourself maximum fundability, aim for an average bank balance equal to at least a few months of operating expenses for your business, including the payments of your loans. This is because even if your sales numbers are great, funders will feel more comfortable if you have some savings tucked away for emergencies.

Time in Business

Let’s think reasonably here, we all know that younger, fresher business have less of a likelihood to acquire longevity. This is why funders will take this factor into account when determining your eligibility.

If you’ve been around for over two years, you shouldn’t have much to worry about in terms of the life of your business.   If you are at least one year in, you should still have funding options. It’s those businesses that have been in operation for less than a year that will find trouble getting funded.

Credit Score

Credit score is not heavily weighed upon when dealing with most small business funders. Since there are so many various methods of repayment when you deal with these types of loans. Your personal credit score is more important to a funding company over your business’s credit score. This is because you are the owner. Your personal financing habits will directly reflect the way you run your business.   This is why we recommend you check your own personal credit score by visiting a website like this.

Did you check? Don’t be alarmed, we’ll let you know if that number is acceptable.

If you are above 700, you’re perfect. Brag about it. You’ll have a large array of loan options available to you.

If you are between 575 – 699, feel good about yourself. That’s not bad. You should still have a good amount of options. Just keep in mind that if you are on the lower end here, you may find yourself limited in your negotiation of the interest rates available to you. Though you will still have plenty of options available to you.

If you are scored at 550 or below, you have what’s considered poor credit. Worry not! We can still help you. Small business funders will work with your credit and find the best types of loans available to you.

Remember, credit is not the end all be all for small business funding.

 

WHAT ONLINE SMALL BUSINESS LOAN PRODUCTS ARE AVAILABLE TO ME?

In addition to the relative ease of qualifying, another benefit to online alternative lending is the much wider variety of loan products available than what you’d find through a traditional bank. Let’s review the traditional and non-traditional small business funding options available through online funding companies:

Term Loan

A traditional term loan is probably what you naturally think of when you think of a business loan. You’ve got short-term and medium-term loans. Short-term funding is revenue based financing where-as medium-term loans are simple interest business loans. The more traditional of the two. You borrow a fixed amount of money, usually for a specifically stated business purpose, and pay back the loan over a fixed term and typically at a fixed interest rate. If you’re looking for a fixed interest rate, predictable monthly payments, and flexibility in how you use your small business loan, a term loan may be the choice for you.

Short-Term Funding

  • No collateral required
  • Limited documentation needed
  • Perfect credit not required
  • Nearly every industry accepted

Medium-term Loan

  • Low rates and flexible terms
  • No collateral required
  • No repayment penalties
  • Personal guarantee required

Invoice Financing

If delays in accounts receivables are endangering your cash flow, then invoice financing something you should be looking into for your business. This means you are essentially selling the amount owed on your unpaid invoices. You sell for about 80% of the outstanding amount, which is advanced to you in cash almost immediately. Then the invoice financing company will set about trying to collect on those unpaid invoices, and you’ll receive a portion of that 20% balance back proportional to the amount the company is able to collect.

  • Minimal documentation required
  • Quick access to future receivables
  • No pre-payment penalties
  • Underwriting process based on your customer

SBA Loan

The U.S. Small Business Administration does not directly lend money to business owners, what the agency does do is guarantee a portion of the principal on certain loans through intermediary lenders, in order to incentivize small business lending. Though many banks do serve as intermediary lenders for the SBA, alternative lenders service SBA loans as well.

  • Longest terms and lowest rates available
  • Minimum 2 years in business
  • Monthly repayment structure
  • Collateral required above $25,000

Equipment Financing

If you mainly need funding to purchase equipment such as computers, machinery, or vehicles, an equipment loan may be a great fit for your needs. This loan works similarly to a car loan in that the equipment itself acts as collateral for the loan; meaning you likely won’t be asked to put up your own collateral as you could with other loans.

  • Potential tax advantages
  • Fast approval process
  • Affordable payment schedule
  • Lease and loan options available

Merchant Cash Advance

This is virtually a lump sum payment of liquid capital offered to a business in exchange for a percentage of the company’s future sales. So basically, when a borrower receives cash from a merchant funding company, he agrees to pay back the cash advance, plus a fee, by allowing the provider to automatically deduct an agreed upon percentage of his company’s daily credit and debit card sales.

  • Minimal documentation required
  • Quick access to future receivables
  • No pre-payment penalties
  • Underwriting process based on your customer

 

WHAT DOCUMENTS WILL I NEED TO PROVIDE?

In order to process your loan application, funders will need a fairly large amount of documentation from you in order to assess your business’s financial standing. To save time during your application, have these documents prepared beforehand.

Business Plan

Our funding brokers will look at your business plan as an introduction to what your business is all about. It shows them your goals and future plans. It is not always required of you to provide a business plan, but in doing so you are providing the funders with more evidence that your company will succeed.

This translates to more confidence from our lenders to give you certain loan products and rates.

Sales Forecast

This is extra important for you newer business owners out there. If your company is still new, your balance sheets and income statements won’t provide enough evidence of your business’s potential. Though it is not required, if you are a newer business, a legitimate and well-researched sales forecast will definitely go a long way towards convincing lenders that your business is reliable enough to handle a loan.

Income Statement

Income statements show the cash flow of your business alongside its ability to meet outstanding debt requirements. Most lenders recommend including both a year-to-date income statement, updated within the last 60 days; as well as statements from the last two years.

Balance Sheet

Your balance sheet represents a snapshot of your business’s financial standing at a point in time. Most lenders will ask for a balance sheet updated within the last 60 days.

Business & Personal Tax Returns

For businesses that have been around a while, you should have your last 2 or 3 years’ business tax returns ready to go. This is a good way for a lender to get an idea of your long-term revenue history. Also, your lender is going to want to see your most recent personal tax return form to verify your income. If the year is coming to an end and you haven’t filed for this year, you should get on that prior to applying.

Business Debt Schedule

These are easy to create and important for this process. This document shows the lender all of your outstanding debts, amounts and payments. If you don’t already have one, you’ll need to create one.

 

HOW LONG WILL IT TAKE TO PROCESS MY LOAN APPLICATION?

This all depends on the accuracy and efficiency of your application. Discrepancies or missing information can cause major delays, so make sure you get it right the first time around.

This answer will vary depending on which type of loan product you are applying for. Term loans and SBA loans may take a few weeks to a month to process.

Then you have loan products such as equipment loans, invoice financing or merchant cash advances which can be processed in as little as 24 hours and provide you with cash in hand within two business days.

 

…Had enough?

Congratulations, you now are knowledgeable about an alternate source of funding that can potentially help you double or even triple your business’s revenue by years’ end. You are now fully capable of making an educated decision about your small business funding options.

Go fill out a free application using all the tips and knowledge you’ve acquired here today! Make us proud and don’t leave anything out!

 

Working With Sprout

Sprout is an online marketplace where businesses come to compare and save on small business loans.  You go to www.SproutLending.com and simply fill out a profile or call us at 800-865-6057. Based on that information you provided, Sprout suggests the best matches depending on the amount and purpose of the business loan you are seeking. Last year, Sprout and it’s staff was responsible for over $100 million in loan approvals.

To speak with a funding specialist now, call:

800-865-6057

 

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