Small Business Lending Research Checklist

Many small businesses use finance to fuel their growth at some point.

Utilising small business lending helps you to fund the steps you need to take to grow, rather than using operating revenue and putting cash flow at risk.

There are a range of options you can use, and they all have different requirements. By preparing yourself with the most important information, you make it much easier and quicker to get the finance you need.

TL: DR

If you’re looking to get small business finance, it’s worth being prepared and arranging it well in advance. Have financial statements and tax returns for both the owner and the business for the past three years. Get your business plan and projections for the future. Be aware that many small businesses don’t qualify for a traditional bank loan, so look at other options such as invoice finance.

Reasons successful businesses borrow money

There are many different things you might want to borrow money for. Common reasons include:

• Covering startup costs
• Boosting cash flow (i.e. paying bills or purchasing stock)
• Fuelling growth (i.e. new product development or purchasing equipment)
• Reducing the personal risk for business owners

Read more: Small business financing tips

The best small business loans allow you to finance whatever activity you need to, without introducing any unnecessary liabilities.

Questions to ask before borrowing finance for your business

The following questions help to sort through your small business loan options to find the best one for your specific situation, as well as how much you need to borrow.

Why do you need financing?

Your reason for getting finance can help your finance manager to match you to the best type of loan. Figure out the exact cost of what you need.

How will the capital be used?

A lender will want to know how you’re going to use the money, in part because it will show them you have the ability to repay it. Specifics matter – include as much detail as you can.

If you’re purchasing equipment, make a decision on exactly what equipment you need. You can even show the lender what it is, and explain how it’ll benefit your business.

When do you want/need the funds?

It can take a long time to get funding approved and transferred into your account. Have a specific date in mind. Ideally, arrange finance well before it’s needed.

What’s your ideal repayment schedule?

Work through a business plan to see how you can meet your repayments. Even with small scale business loans, missing repayments can come with expensive penalties, so you need to be able to afford every payment.

Read more: Your guide to improving business cash flow

Your lender will have standard procedures and expectations, but you may be able to negotiate certain terms that make repayments more favourable to you.

How healthy is your personal/business credit?

As a small business owner, you’ll often be personally liable for business debts. Your own credit history matters – lenders will need to be satisfied you can guarantee the loan in order to approve it.

Choosing from various types of finance options

When you start out looking for small business finance options, it can quickly get overwhelming.

All you’re looking for is a loan, but you’ll quickly discover there are a lot of banks and small business lending companies, and they all have different products, requirements and systems.

The best business loans for small businesses often comes down to your specific situation. You may be ineligible for some, while others may not be suited for some uses.

Bank loans

A traditional bank loan is probably something you have in mind already. They often have the lowest interest rate, but can be hard for small businesses to get.

You’ll need to have enough assets to secure the loan against, as well as a satisfactory credit history. Many small businesses don’t have one, or both, of these.

Read more: Short term loans vs long term bank loans

Banks often require loans to be of $100,000 or more, which can be more than small businesses need.

Bank lines of credit

A business credit line is similar to a credit card. The lender makes a certain amount of cash available, but you don’t have to use it all at once. You’ll only pay interest on the amount that’s outstanding at the end of a given period – usually a month.

Like bank loans, lines of credit can be hard to get, and it will take some time to get approved.

Invoice financing

Invoice financing is a great way to borrow small amounts. It works by using a specific invoice finance company to borrow the value of your invoices. The balance is repaid when customers pay the invoice.

It allows small businesses to boost their cash flow in the period between doing a piece of work and being paid for it.

Crowdsourcing

Crowdsourcing has become popular in recent years because it also helps to validate business plans. Platforms such as GoFundMe and PledgeMe allow businesses to go out to the public for funding.

This is a good option for businesses that can’t get other forms of finance.

Your 5-item small business financing checklist

When approaching any small business lending source, it helps to have all the paperwork you need sorted and ready to go. As you’ll have seen, some forms of finance can take time to get approved, particularly if you don’t have the information you need.

Often, if you’re looking for finance, you’ll want it as soon as possible. In these cases, the best small business lenders are simply the ones that can get it approved fast.

In order to avoid that issue, try to identify finance needs in advance in order to arrange lending well before you’re going to need it.

Income tax returns from previous years

Traditional lenders will often want to see reporting from the last three years. This includes personal and business tax returns. If you think you may need small business lending in the future, keep in mind that lenders will be looking at your tax returns.

Business plan

Having a business plan shows lenders that you’ve thought about how you’re going to grow and have an informed approach to a set goal. Be prepared to be quizzed about your plan too.

Financial statements and projected financial statements

Again, these are both your personal statements and business – although you aren’t expected to project personal finances quite so much.

If you’re applying for a secured small business loan, lenders will pay particular attention to the assets you have on your balance sheet. These assets will serve as collateral.

Having projections show lenders that you have a plan and you’ve done work in preparation for your loan application. It can make a significant difference in getting finance approved.

Personal and business bank statements

Lenders want to know how much money you have. They may also want past bank statements, so be ready to answer any questions about periods where you were low on cash.

Legal documentation

This includes things like your business licence, registration and any other licences you need to be able to trade.

Invoice financing: The best alternative for business finance

Of all the options discussed, only invoice financing satisfies all the typical requirements of small business owners. It’s fast to get approved, easy to get, doesn’t involve carrying long term liabilities on your balance sheet and is designed specifically for the needs of small businesses.

Best of all, it works alongside other forms of borrowing to increase your flexibility and reduce the costs involved.

You can use invoice financing to increase the cash you have on hand, and reduce the amount you need to borrow from a bank. Your debt will incur less interest and you’ll pay it back faster.

With FundTap, setting up an account takes just five minutes, and you can be approved for funding the same day. It’s much easier to get finance approved compared to a bank loan because invoices are a much more reliable form of security.

From there, you have an instant form of finance available whenever you need it. Getting finance is as simple as submitting an invoice for funding. The money can be in your account within hours.

There are no regular costs and it’s free to create an account, making it ideal for small businesses that go through ups and downs and need a flexible finance option.

See more about the benefits of invoice financing/factoring or find out about how FundTap has helped users to increase their turnover by 54% in the last two years.