5 Things to Know About Funding a Small Business
As small businesses reach the other side of the financial crisis caused by COVID-19, many are now seeking funding for their next move. That's according to Reuters, which reported a rise in demand for business loans in 2022.
Perhaps you are now seeking finance to help grow or support your business. Whether you need a short- or long-term financing option, understanding what is on offer and how to improve your chances of securing the right loan is helpful.
To help you do that, we've put together this quick guide on five things you need to know about funding a small business.
1. A Business Loan May Require a Guarantee
Some small business loans will want you to put up personal assets as a form of guarantee on your loan.
A personal guarantee is a commitment (or promise) you make to the financing company. It means that you will personally repay the loan if you end up in a situation where your business cannot repay it.
That personal asset is most likely your home; for most of us, our house is the most expensive asset we own.
Suppose you run a business in partnership with another owner. In that case, you'll need to consider whether a personal guarantee loan is the right financial choice.
You'll need to ensure the legal paperwork is clear and outlines each partner's liabilities. And remember that you will take on financial risk that has a significant downside (losing your home).
We all have optimistic hopes for our business. Still, sometimes external factors appear that we can't predict, throwing our business off course.
Consider this reality before deciding how much you want to include as a personal guarantee to secure a loan for your business.
2. A Lender Will Want to See Numbers
Most lenders will need detailed information about the finances behind your loan. That means outlining how you will spend the funds and what sort of return you expect on those investments.
At a minimum, prepare a business plan, and use it to share your business goals with the lender. That business plan must include your profit forecasts and a detailed breakdown of your expenses.
Include information about your industry trends, marketing strategy, and other external risk factors such as economic downturns.
You must demonstrate that you have a solid plan and have thought through all possibilities and consequences. By doing that, you have a better chance of securing the loan your business needs.
Remember to talk, too, about your strengths as a business and what sets you apart from your competition.
If you intend to use the money to design and launch a new product, discuss that innovation and how it meets a gap in the current marketplace.
3. You'll Need to Check Your Credit Score
One thing small business loans have in common with personal loans is the importance of excellent credit history. Lenders will want to know you aren't a default risk and will make your repayments on time.
Having an average or poor credit history might not stop you from securing a business loan. Still, it will likely make that loan more expensive. That will ultimately impact your profit margins as a business, so improving your credit rating is worth it financially.
First, check your business's current credit score. After, begin searching for current loan rates on the market.
If your score looks low, consider whether it's worth spending 6-12 months improving it before applying for your small business loan.
Or, think about whether you can go for a smaller loan in the interim and use that loan to demonstrate an exemplary repayment record. You can apply for a larger loan (with lower interest rates) once you've improved your credit score.
4. There Are Many Different Small Business Loans
At River Point Capital, we understand that all businesses have different financial needs. So we offer a range of financing to best fit your situation. Here is a breakdown of the types of business financing you might consider:
Lines of Credit: A line of credit is an ongoing, short-term credit option to help you fund purchases for your business. That is useful if you have ad-hoc but have urgent needs and want to avoid the delay of a loan application.
Short-Term Finance: Short-term finance suits a company with short-term cash flow issues. This option will help your business continue to run and pay expenses.
Inventory Loans: Perhaps you need money to pay for inventory. If so, you could opt for a specially-designed inventory loan. These secured loans help you purchase the merchandise you need to meet customer demand.
Bridge Loans: Bridge loans help you meet a short-term funding need until a more significant round of business financing, such as an upcoming IPO.
5. All Financial Funding Involves Risk
Some business owners feel that a business loan is riskier than other financial funding options such as family support or angel investment. But that isn't always the case.
Let's start with the assumption that family finance is low risk. That assumption is often wrong because family members (and friends) tend to lack experience as lenders and may not realize their commitments and risks.
If they want their money back earlier than anticipated, is that feasible? If not, do you need to draw up a legal agreement to cover all scenarios?
What about the risks associated with angel funding? The first thing to note about angel funding is that it is hard to obtain. There aren't many angel investors around, and there is plenty of competition to secure finance.
And the main risk of angel funding is that you will give up a share of your business. How much you give up in shares depends on your business valuation, and that's where it becomes a risk.
If your valuation is too low, you essentially have a financing source that is more expensive than a traditional loan.
Next Steps for Funding a Small Business
Now you know a bit more about the process for securing a loan and funding a small business, it's time to take the next step.
On our site, you'll find details about the financial products we have on offer. Take a look now to see which financing product will suit your business, and start your loan application with us.