At first thought, the best time to apply for a small business loan is whenever you’ve determined that your business needs one. While having access to enough capital to keep your business afloat is a must, there are times when you should and shouldn’t apply for a business loan.
Here are factors you’ll want to consider before submitting your loan application.
Apply After You’ve Done Your Research
With dozens of different types of business loans and even more lenders, it’s important to do your research before applying for a business loan. While you may desperately need money to purchase new inventory before an upcoming busy season, you want to ensure that you’re borrowing the right kind of money from the right source.
For example, if you own a small company that’s been around for at least a few years and have steady monthly cash flow, a small business loan may be the ideal option. Or if you’re looking for access to revolving funds, a business line of credit makes the most sense. Be sure you know your borrowing needs and find the loan and lender that meets them.
Applying for the wrong type of business loan or using the wrong lender can be a financial decision that sticks with you for years. Take the time to research to be 100% certain that you’re making the ideal business decision.
Apply If You’re in Good Credit Standing
Have you recently applied for a personal or business loan? Do you have a high debt-to-income ratio? Are there delinquencies or issues on your credit report that are negatively impacting your credit profile?
If you’ve answered yes to any of these questions, now isn’t the best time to apply for a business loan. One of the biggest factors that lenders consider when reviewing business loan applications is your credit standing. In this instance, both your personal and business credit scores matter.
Take the time to improve your credit score before applying for a business loan. Increasing your credit score just a few points can have a huge impact on the loan terms and interest rate that you’re approved for.
To improve your credit standing:
- Pay off debt
- Don’t apply for other lines of credit
- Make on time payments
Depending on your credit profile, waiting to apply for a business loan may be in your best interest. Otherwise you face a high interest rate, the need to apply collateral to the loan, or an outright application denial.
Apply If You Have Stable Cash Flow
Aside from your credit standing, businesses also care about your business’ monthly income. Lenders want the assurance that your business is able to maintain stable cash flow for at least a few years. This lowers the risk of you defaulting on the loan which could mean thousands of dollars lost for the lender.
As a rule of thumb, only apply for a business loan when you have proof that you can afford to make payments. Lenders will want to see your account statements as well as tax returns for confirmation of business income.
Of course, there are some exceptions to this rule. For example, if your company is seasonal (ie. construction or landscaping), it’s inevitable that you will have months of little to no income. In this instance, you’ll need to show how you can still afford to make loan payments even if business is down.
Apply If You’ve Created a Business Plan
Having a business plan is all part of the convincing a lender that your company is worthy of being loaned thousands of dollars. Lenders want to know that you’re running a seemingly successful and credible company. They also want to know that you’ve not only figured out how your company current operates, but how it will be successful 10 years in the future.
Your business plan should detail your company’s vision. What makes your business unique? What’s your plan to success? What type of competition are you up against? How do you plan to grow?
These are all questions that a solid business plan should answer.
Apply If You Have a Reason
Lenders not only want to know about your company, they also want to know what you plan to do with the money you’re borrowing. A lender is much more likely to loan your business money if you’re able to provide information that details how much money you need, how it will be used, and how your purchase will positively impact your business.
Let’s say you want money to purchase company vehicles. Instead of just telling lenders that you want to buy company vehicles, explain how they will benefit your company. for example, having business-owned vehicles make it easier for employees to travel to local clients as well as a more convenient way of networking and marketing in the community.
Knowing the most ideal time to apply for a loan can greatly increase your chances of getting approved. With these tips, you can better determine when the best time is for you to apply for a business loan.