10 Things You Need to Know Before You Apply for Business Funds

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Applying for business financing is not only a somewhat lengthy process but sometimes a necessary one. To ensure a smooth experience, being organized, and communicating with your financial institution is key. Everyone is aware of what the end goal of applying for finances is: business funds. But what about the steps in between? Here are the ten things you need to know before you apply for business funds.

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  1.   Provide a Business Plan
  • Not only will financial lenders probably want to look over your business plan, but it’s also an important document for you as well. A business plan details what you plan to do and how you intend to do it. This is a great place to start when considering the amount of money, you want to finance. Business plans have a finance section. It includes information which includes:
  • How much you started with
  • How much you intend to grow in a certain amount of time
  • What departments and costs your income contributes

Showing this to a financial lender confirms your professionality and assists with getting approved for a loan.

  1.   Monitor Credit Scores

You can guarantee that financial lenders will require credit scores and credit history to determine financing eligibility. That’s why it’s a good idea to check what lenders are wanting, as far as credit scores. And if applying for a small business loan, you can expect to submit your personal credit score as well. The rule of thumb is 700+ credit scores are more likely to get approved for better interest rates. Credit scores are a significant indicator of lenders on whether you can repay your debts or not. Often applications with credit scores below 600 are rejected due to their higher risk of defaulting on a loan.

  1.   Research Options

Not all business financing is created equal or will match your business’ needs, offers something different. One option is invoice financing. This allows businesses to borrow against invoice amounts. This helps to improve cash flows, pay suppliers, and reinvest in company growth. It allows businesses to access their money sooner than if they had to wait on paid invoices. Some companies utilize express invoice financing that involves no paperwork, doesn’t lower credit scores, and funding is faster.

  1.   Organize Paperwork

Lenders will require you to submit several business documents confirming your operations. It allows lenders to feel confident in your ability to manage a business and decrease your risk factor. Paperwork to gather will be a business plan, tax returns, bank statements, proof of ownership, and financial statements.

  1.   Offer Collateral

Business financing is often secured with collateral. A lender prefers collateral that can be easily liquidated if the borrower defaults on the loan. This way, they can sell it to pay the loan. Of course, lenders prefer cash as the main source of collateral; however, businesses can also offer buildings, equipment, stock, and accounts receivables.

  1.   Research Loan Covenants

Loan covenants require the borrower to realize certain agreed on conditions or prohibits the borrower from participating in certain actions. Following these covenants secures your financing and keeps it in good standing. Examples of loan covenants are:

  •         Maintain an agreed net worth
  •         Don’t exceed certain debt amount
  •         Comply with financial ratios
  1.   Know Accounts Receivable Data

Financial lenders will request detailed accounts receivable data, including aging, account information and payment history. This is to verify the accounts you work with and estimate their credit history and reliability.

  1.   Know Accounts Payable Data

They will require similar information that was requested for accounts receivables, but they’ll also want to see credit references. They can do this by reaching out to the accounts your business works with to verify payment history.

  1.   Think Forward

Business financing is for when your company needs it. If you’re applying when you need it, you will likely pay higher interest rates and rank higher as a risk factor. This is because there’s a chance your cash flows are not performing well, or you’re having trouble meeting payment deadlines. The best time to apply for lines of credit is before you need it. Applying before you need the loan gives you a better chance of being approved for a line of credit with good terms and rates.

  1. Classify Your Industry

The type of industry your corporation is in matters. In fact, most financing applications will ask this. Why? Because the type of industry can affect eligibility and risk factor. Some industries are blacklisted, and lenders refuse to work with them. Such industries are adult entertainment, childcare, and firearms. This can be for many reasons. More obvious reasons would be it hurts the credibility and reputation, while others are not so much. You’ll need to research if your industry is eligible for your financial institution. Regarding blacklisted companies, you can find more information at  HuffPost.

That rounds up the ten things you need to know before you apply for business funds. It’s important to stay organized and research as much as possible about your options, financial lenders’ requirements, and your own business.

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