Most business owners are aware of the general requirements for business loans. To be approved, applicants must possess excellent personal credit, at least two years in business, consistent cash flow, and vast working capital reserves.
But banks are no longer the only sources of competitive business loans. Plenty of alternative business financing companies can give smaller, younger businesses the borrowing amounts, terms, and rates they need to succeed. And compared to banks, the requirements are significantly looser. Applications won’t immediately be rejected due to issues with personal credit or cash flow.
However, this doesn’t mean that any business with a working pulse can qualify. Alternative business financing companies have their own criteria for assessing trust. It’s just very different than the criteria utilized by banks.
In this article, we’ll answer the following questions and more:
- Which Businesses Are Successful at Getting Funded?
- How Does Budgeting Help You Access Business Loans?
- Why Is Monitoring Cash Flow Important for Business Loans?
- Do Businesses Need Revenue Projections to Get Funded?
- How Do Successful Businesses Use Business Loans?
- Can You Use Business Loans to Cover Operational Costs?
- What Are the Most Popular Uses for Business Loans?
- How Do Business Loans Fund Marketing Campaigns?
- Which Employees Can You Hire with Business Loans?
Which Businesses Are Successful at Getting Funded?
Rather than basing decisions on just a few numbers (i.e., credit score, annual revenue), alternative business financing companies focus more on financial management tactics. In other words, business owners who manage their finances more carefully are more likely to be approved.
The following tactics suggest that the business will be able to pay off the debt on time without damaging cash flow in the process:
How Does Budgeting Help You Access Business Loans?
Your budget determines how much money you can afford to spend every month while covering operational expenses. Once you receive your business loan, you’ll have more money at your disposal, but your monthly spending will increase as well. However, if you’ve maintained a steady budget since starting your business, this won’t be your first time dealing with this effect on your business’s finances.
Business owners with concrete budgets are less likely to ask for more money than they can afford to pay back. When deciding how much to ask for, they calculate the impact of potential monthly payments on their ability to cover operational expenses while growing the business simultaneously.
If you know the importance of staying on budget, you’re less likely to take on unnecessary expenses. For example, you wouldn’t hire another full-time employee to fill an empty position.
Why Is Monitoring Cash Flow Important for Business Loans?
Without effective cash flow management, all the world’s revenue won’t stop the business from failing. Companies that prioritize cash flow are fully aware of how their expenses and sales cycle affect profitability. And as a result, they have taken appropriate measures to improve both areas. For example, a business that gets paid via invoices might arrange a payment schedule that spreads its revenue out throughout the month.
Most financial institutions require bank statements from business loan applicants. Effective cash flow management ensures that the business pays itself at the right time and always maintains a sufficient bank balance.
Businesses that prioritize cash flow also know which time(s) of the year they are spending and earning the most money. Both periods should determine when the business applies for funding and the requested amount.
Do Businesses Need Revenue Projections to Get Funded?
Many businesses hesitate to take out loans because they don’t know what their future will look like. What if a series of unforeseen expenses arise when they’re supposed to be making monthly payments? It’s entirely understandable for anticipate these circumstances in the near future. But that means you have to factor them into your projections for demand and revenue.
This might alter the size, terms, and repayment structure of the loan you apply for. But that’s exactly what institutions want to see. To clarify, institutions favor businesses that have realistic goals. Virtually every company has been affected by external circumstances at some point. For this reason, institutions want to see projections that account for your past. Even though your business might be earning more revenue than last year, you should still plan for that revenue to hit a few bumps as you make monthly payments.
Get Your Documents and Books In Order
Before you fill out your first application, it’s imperative to make sure your books and financial statements are up to date. This will confirm whether or not your idea of your business’s financial health is genuinely accurate. For example, you might not have noticed a slight decline in profitability over the past few months because it did not impact day-to-day operations. But this will undoubtedly affect the borrowing amount, terms, and interest rates available to you.
Knowing this information like the back of your hand will also make you seem more organized and responsible. Don’t assume that institutions won’t ask about these issues because you can still get approved with poor credit and rocky cash flow. In summary, be prepared to explain how you got into your current dilemma and what you plan to do to prevent it from happening again.
How Do Successful Businesses Use Business Loans?
Unless you are applying for a business loan from a bank, you probably won’t have to disclose the loan’s purpose. Remember, banks prefer to lend large amounts with extended terms. These are the tools required for significant investments, and the wrong investment of this magnitude could spell a business’s demise. Hence, if the bank believes your investment is too risky, they might reject your application exclusively on those grounds.
Alternative business financing companies aren’t as concerned with the loan’s purpose because they’ve already reviewed the criteria from the previous section. They know you have a solid plan for your business’s future and aren’t on a downward decline. This is very different from the inevitable cash flow crunch.
Can You Use Business Loans to Cover Operational Costs?
If you intend to use your loan to cover operational expenses, you must prove that your current inability to cover them is due to uncontrollable or unexpected circumstances. In other words, you shouldn’t apply for funding just because your business isn’t gaining traction. A loan can’t change the fact that your target audience isn’t buying your products or services.
What do we mean by uncontrollable or unexpected circumstances? Maybe your primary vendor has gone out of business, or a fire in the market next door has ruined foot traffic for your shopping center. Other common examples include equipment breaking, key employees jumping ship, or an unexpected bout of inclement weather.
Speaking of weather, another common purpose of business loans is offsetting a loss in revenue due to seasonality. Highly seasonal businesses cannot prevent their slow seasons from occurring. However, they can undoubtedly implement new strategies to maximize revenue and profits from the upcoming busy season. This is the only way highly seasonal businesses can stay competitive, and institutions know that. They prefer to work with seasonal businesses that understand the importance of the busy season and are therefore planning their strategy well before it begins.
What Are the Most Popular Uses for Business Loans?
A myriad of events can cause cash flow crunches. But generally speaking, businesses tend to use loans for the same purposes. If demand is rising, they could use the loan to hire more people since revenue from this demand hasn’t materialized just yet. Loans can also be beneficial for purchasing new equipment that is vital for resuming day-to-day operations. Common examples include ovens for a restaurant or medical technology for regular examinations. Institutions may be less willing to approve loans for advanced devices that have yet to prove essential for your industry.
Large-sized loans are often used to purchase additional property or even buy an existing business for sale. If you’re looking to buy a franchise, this is perhaps one of the safest uses for business loans. Unlike brand new businesses, franchises can attract customers with their familiar names and products. The track records of other locations (and the entire franchise itself) can also serve as data for revenue projections. Franchisors like to see new franchisees taking out business loans. It shows that the franchisee understands just how much money is required to get the new location off the ground.
How Do Business Loans Fund Marketing Campaigns?
Though these are the most common uses for business loans, they are not the only uses permitted by financial institutions. For example, let’s say you launched a digital marketing campaign a few months ago, and it’s taking longer than expected to increase revenue. In the past, the logical move would be to end the campaign. But increasing revenue is not the only benefit of digital marketing. Today’s marketers are also very focused on collecting data on customer behavior. Rather than advertising as aggressively as possible, the goal is to modify your existing advertisements to suit your target audience’s preferences better.
So, instead of ending the campaign, you could take out a business loan to keep it running for the sake of data and optimizations. As you pay off the loan, you could make more changes to your marketing materials based on what you’ve learned about your target audience. Digital marketing campaigns are only useful if they are given enough time to collect data and optimize accordingly.
Which Employees Can You Hire with Business Loans?
Earlier, we mentioned the popularity of using business loans to increase staff. But some types of employees don’t immediately begin contributing to revenue on their first day of work. Take a social media specialist, for instance. This position is undeniably valuable. But it could take several months for their efforts to generate more sales. The same concept can apply to someone who specializes in customer service or streamlining systems and processes. Many businesses need these employees but don’t have the money to hire them just yet.
This presents another overlooked but highly reasonable purpose for a business loan. You might hesitate at the thought of taking on more debt for someone who doesn’t make sales on their own. But think about the other benefits of your new hire. No, this person won’t be selling products or services directly. But they will bring more potential customers or clients to your existing team, or at least allow them to speak to more potential customers each day. And as your efficiency increases, you’ll have to spend less money to make each sale. These are the kind of benefits financial institutions need to hear.
If You Meet This Criteria, You’re Already Successful
Businesses that meet the previous criteria (including use of funds) are more likely to get the funding packages they are looking for. They are also more likely to see their loans achieve their intended purpose.
A key trait of successful business owners is knowing what works and what doesn’t. It doesn’t matter if their businesses are only five or six months old. They still know how to spot a wise investment and learn from their mistakes. In the eyes of financial institutions, business owners who possess this trait are already successful. Institutions have seen many businesses succeed and fail at paying back loans. If your track record suggests that you belong to the former group, your application’s approval is essentially a guarantee for a prosperous future.