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Long-term business financing provides a significant infusion of capital which can be used for investing in equipment, purchasing real estate, or even acquiring another business.
However, the application process can seem daunting, especially for businesses that haven’t secured financing in the past. Lenders often want to see strong financials and significant evidence of your business’s potential future success before lending.
Learning how small business owners can secure long-term financing to help grow their companies is a crucial step to growing an existing business.
Securing Long-Term Financing, Step-By-Step
Here’s how to get long-term financing for your small business:
- Evaluate your needs: First, figure out how much financing your business needs and why you need it. For example, are you looking to invest in new equipment? Do you need additional working capital? Think about what your needs are.
- Assess loan types: There are tons of financing options to choose from, including loans or lines of credit from private traditional and online lenders. You could also explore Small Business Administration loans and online lenders. Consider whether you want to use collateral as well.
- Check your financials and credit score: Look over your financials as well as your personal and business credit scores. Pay close attention to debts, cash flows, and savings. Stronger financials and a higher credit score can help you get more favorable terms.
- Put together a business plan: This shows how your business earns revenue, its growth potential, and more. Items to add to your plan include market analysis, financial projections, a brief description of how your business works, and how your financing will play a role. A detailed business plan also conveys a sense of professionalism and preparedness, crucial to winning the lender’s trust.
- Get documentation together: You’ll need several documents to verify personal and financial information. Collect tax returns, bank statements, and business financial statements to provide to the lender.
- Consider seeking preapproval: Preapproval shows you terms you are likely, but not guaranteed, to qualify for. It helps narrow your financing choices before applying to maximize approval chances and avoid too many hard inquiries.
- Apply for business loan: Fill out the formal application. Make sure you don’t miss any fields on the form and that you attach copies of any relevant documentation. Triple-check all your answers for accuracy and completeness before applying.
- Get ready for loan interview if necessary: Some lenders interview financing applicants to gain more information about the applicant and their business. Review your business plan and mentally prepare to confidently and clearly discuss your business with them. This will leave a strong impression and ensure they understand your business.
- Review and accept terms: Once the lender approves your application, review all loan terms. That includes interest rates, repayment schedules, prepayment penalties, other fees, and other “fine print” items. Don’t hesitate to ask questions. Make sure everything aligns with your needs before signing the documents.
- Receive funding: Finally, the lender deposits your funds into your business account (if it’s a loan) or provides you with account information (if it’s a line of credit). This could take several days or weeks for traditional lenders, though some lenders release funds the same day that you apply. You then use the loans for their intended needs and prepare for repayment.
Four Tips to Strengthen Your Application
1. Improve Your Credit Score
Strong personal and business credit scores offer numerous benefits regarding obtaining business loans:
- Higher approval chances
- Larger loan amounts
- Better interest rates
- More available financing options
Here are a few quick tips to raise your credit scores:
- Make all debt payments on time
- Reduce your credit card balances
- Keep credit accounts open
- Avoid applying for new credit within six months leading up to seeking business financing
2. Reduce Your Debt-to-Income Ratio
Debt-to-income ratio, or DTI, measures your total monthly debt payments against monthly income. For businesses, “income” in DTI is gross monthly revenue.
A lower DTI, meaning less debt relative to income, shows you have more budgetary room to cover the new loan’s debt payment.
Aim to keep DTI below 40% at most. That said, reduce it by tackling some of your higher-interest debts before applying. Increasing gross monthly revenues can also help if you have the resources to do so without your financing.
3. Put Down Strong Collateral
Valuable collateral, such as equipment, a vehicle, or inventory, reduces the lender’s downside risk since they can recoup losses if you default by taking the collateral. This allows the lender to offer lower rates, easier approvals, and other more favorable terms.
Keep in mind that secured loans (those that use collateral) tend to limit the loan amount to the asset’s value. That means secured loans could work well if you’re getting the loan specifically to purchase an asset or refinance existing debt on an asset.
4. Provide Evidence of Business Performance
Business loans generally require a business plan to show how your business works. However, you can make your business plan and the potential loan interview more compelling if you bring more evidence to the table.
A few things to show your lenders could include:
- Financial projections: These estimate your future financial performance in terms of sales, revenue, profits, cash flows, and other key metrics.
- Financial statements: These show your business’s current status. For example, an income statement demonstrates financial performance, while a balance sheet shows your assets and liabilities.
- Vendor/supplier relationships: Demonstrate strong relationships with vendors or suppliers. Highlight favorable payment terms, good contracts, and similar evidence.
- New client/customer contracts: If you have recently landed significant new business, show that to the lender. This strongly indicates increased revenues and cash flows.
Secure Financing for Your Small Business
Getting a long-term business loan may seem like a lot of work. However, sticking to and working through the process step-by-step can make applying easier.
That said, improve your credit score as much as possible and reduce your DTI before applying to access the best opportunities. Once ready, provide substantial evidence of your business’s strength and consider using a valuable asset as collateral if needed.
By following these steps, you can obtain the financing you need to grow your company to new heights.