Securing the Future – A Guide to Small Business Loans

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Small business owners often seek financing to grow their company or get through a rough patch. Many lenders have strict eligibility requirements for borrowers. These can include revenue, credit scores, and how long the company has been in operation.

Financing options include loans, lines of credit, and credit cards. You can also use invoice factoring and revenue-based financing to finance your business.

1. Defining Your Purpose

A business loan can help a small business achieve goals such as expanding, buying equipment, or bridging a cash flow gap. However, obtaining financing requires careful consideration of your financial needs and repayment ability.

A loan can be obtained through a bank, credit union, direct online lender, or microlender. Each type of financing has its own terms, fees, and interest rates. The best fit for your needs will depend on your business’s profile, including its financial history and current growth trajectory.

Defining your purpose will guide you in selecting the right financing option and aligning it with your strategic plans. A well-prepared loan proposal can also boost your odds of securing funding. 

2. Collateral or Personal Guarantees

Lenders typically ask for collateral or something of equal value that can be sold to satisfy your debt if you fail to repay the loan. Collateral is considered one of the traditional Five Cs used to assess your creditworthiness, along with capacity, capital, character, and conditions.

However, some lenders offer financing that does not require any collateral. A business line of credit is an example of such an option. This type of financing allows a small business to borrow up to a set dollar amount and then repay those funds as they generate revenue over several years.

However, even with this alternative to conventional loans, lenders will still likely require a personal guarantee from the owner or owners of the business. This is a way to ensure that the lender can collect on the debt if the business fails. The personal guarantees can be limited or unlimited, with the latter allowing the lender to take all of the owner’s personal assets. Some loans will also include a term called “joint and several liability,” meaning all owners of the business are equally liable for the company’s debts.

3. Financial Statements

If you’re considering a small business loan, lenders will want to see financial statements like income and cash flow statements, balance sheets, and statements of owners’ equity. These documents provide an overview of a company’s financial health for a given period and help investors, creditors, regulatory bodies and business owners understand and evaluate a company’s risk.

By preparing these documents, you can ensure that your application is complete and accurate. A well-prepared financial statement will demonstrate that you have the capacity to repay the loan and cover expenses should your revenue decrease or increase.

Additionally, a financial statement can help you identify areas where your business could improve profitability and cash flow. By comparing your business’s performance to those of similar companies, you can also pinpoint opportunities for growth. Finally, a financial statement is a key component of maintaining compliance with laws and regulations regarding tax returns and other required documentation.

4. Tax Returns

As a small business owner, you may need to prove to lenders that you can make your proposed loan payments. This requires documentation such as business plans, financial statements, and bank account records for both you and your company. You’ll also likely need to provide collateral if you can’t afford to pay back your loan, such as equipment, inventory, or real estate.

Lenders often prioritize business loans for companies that will create long-term value for the business or make a positive economic impact, such as acquiring land to expand operations and hiring local workers. Lenders will consider your company’s current and projected earnings when determining whether or not to approve a loan.

A debt service coverage ratio (DSCR) is an indicator of your company’s ability to repay its debts. It’s calculated as a company’s total annual net income divided by its total annual debt. A DSCR below one typically means you won’t be able to meet your business loan repayments. A higher DSCR indicates you’re able to comfortably meet your company’s borrowing needs.

5. Personal and Business Credit Scores

For years, a small business owner’s personal credit score was the single most important factor in traditional bank lenders’ approval process. Today, new digital algorithms weigh a wider range of financial information and can more accurately determine a company’s eligibility for a small business loan. Still, lenders consider a borrower’s personal and business credit scores, as well as their company’s cash flow, revenue, industry risk, and even its future financial forecasts when considering a loan application.

Similarly, lenders look at your business’s payment history with vendors and lenders, how much debt the business has, and its level of credit utilization. Making on-time payments may positively impact a business’s credit profile, and paying off debt early is often beneficial. For businesses with limited or poor credit history, obtaining a business loan with no credit check can provide access to necessary funding without the need for a strong credit score.

In some cases, if the lender feels the business is too high of a risk to lend money to or partner with, it may ask for collateral to cover its losses in the event the company defaults on its loan payments. Generally, lenders also expect the owners to provide a personal guarantee as an additional financial cushion.

Final Words

BitX Capital offers a streamlined process for small business loans, connecting businesses with lenders tailored to their needs. With options like SBA 7a loans, short-term loans, and merchant cash advances, BitX Capital helps businesses secure funding quickly, even with less-than-perfect credit scores. Their mission is to empower entrepreneurs by providing the right funding at the right time.

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