What to Do When You Say I Need a Small Business Loan
Article summary: When a business owner or nonprofit director says I need a small business loan, the worst thing to do is to wait until the last minute. It’s vital to get funding in place ahead of time…before you need it.
Why You Might Say I Need a Small Business Loan (and when not to)
If you are outsourcing and want to bring those functions in-house – hiring staff is one of the top reasons for getting a business loan. When you were first starting out, outsourcing may have saved your business by allowing you to handle many back office responsibilities while giving you more bandwidth to manage more critical projects. Whether you have been working with agencies, independent contractors or managed services, now that your company or nonprofit is more successful, it may be time to bring those functions back home. A short term business loan may help.
You want to build your business credit – it is typically difficult for a small business with less than $10 million in annual revenue to obtain a major business loan. Banks heavily weigh your credit history when making loan decisions. The less business credit history you have, the more they will look at your personal credit history. Getting smaller short term loans might help you plan for and apply for a larger scale loan in the future.
To grow your business – many business owners believe a business bank loan is the only way to do this. However, if you can’t grow your business through existing sales, an infusion of cash won’t help. Increase sales ≠ increase in profits. This is often the biggest mistake business people make. You should use existing cash flow and reinvest it in your business instead. If you are expecting to get a loan from a bank, you need to prove that your business model works and needing money to grow demonstrates that maybe it doesn’t, so you will be turned down.
A new business opportunity comes up – good deals don’t come up every day so when they do you need to pounce. It could be a chance to order inventory at a discount. Or perhaps your business neighbor is moving and you want to quickly grab the extra space for your expanding staff. In this instance, you may say I need a small business loan, but it’s likely that you won’t be able to get it in time. This is when you need to explore other small business financing options.
To find out which type of business funding is right for your company or nonprofit, you first need to know what is available.
What Are Your Options When You Say I Need a Small Business Loan?
1. SBA loans
While the Small Business Administration does not directly grant loans, they do help to connect you with business loan direct lenders. The SBA works with businesses and these lenders to put the banks more at ease with loaning money. Unfortunately, their process is agonizingly slow. It will take your accountant days just to fill out their application and months before you receive an answer.
This is when you use your accounts receivable as assets to get business cash now. A factor will pay you a percentage of what they are worth upfront. This way, you get your money now as opposed to waiting 30, 60 or 90 days for your clients to pay. Regrettably, there are numerous disadvantages to this option. For one thing, your clients will have to make their payments to the factor. This is the equivalent of a flashing neon sign saying your business is in financial trouble.
3. A business line of credit
The number one problem with many small businesses is that they don’t think proactively about fast business financing…until it’s too late. And the number one reason this funding is usually needed is to make payroll. You may not know it, but it’s actually illegal to miss payroll. If you do, your employees can report you to the IRS. This, in effect, opens the door for the government to snoop around your business affairs. Or, your workers might start smelling blood in the water and go elsewhere.
With a business line of credit, you always have a supply of cash you can draw on to ensure you make payroll and pay your bills on time. You can turn to Financing Solutions for instant business funding in about 48 hours.