Over the course of a business’s lifespan, the need for financing or fast access to cash will more than likely arise. Sometimes it can help get a business off the ground or expand, while other times it could mean the very survival of the company. In fact, 82% of small business owners that had their business fail cited cash flow as the primary factor. Regardless of the reason, it’s important that when that moment comes, small business owners in any industry – but especially construction – put themselves in the best position possible to be able to receive the financing they need. Here are three things all business owners should be doing to improve their chances of receiving a loan or line of credit:
1. Know the Intended Purpose for Any Financing
It’s critical to have a clear purpose when applying for a loan. To be eligible to receive a small business loan, owners will need what is called a stated purpose. This means that whether you are looking to bring on additional employees, cover an unexpected expense, or buy some new equipment, you’ll need to outline what it’s for in the application process. The expectation from the financial institution is that borrowers will then use the money for that stated purpose. If the funds are used for something else, the financial institution has the right to check on this and ask for full repayment.
Another essential component is knowing the type of loan needed. If your business is experiencing substantial growth, a fixed-rate loan could be the way to go, while businesses in other stages of growth could benefit more from a credit card for everyday expenses. Whatever the case may be, it’s important to discuss these options with a bookkeeper or CPA to understand which type of financing makes the most sense.
2. Make Sure Now is the Right Time
Once you’re clear on what financing is for, it’s important to do a bit of a self-review and make sure you meet the criteria to qualify for funding. The most common reason we see small business owners get denied for loans is simply because they are unprepared. After landing on a preferred type of loan, make sure you have all the documentation needed. This includes business license, articles of incorporation, DBA (doing business as) paperwork, trade name association, tax returns, etc. Most banks will also ask for two fiscal tax returns, meaning you would need to be in business for more than two years.
Another common problem we see owners get tripped up by is ownership. It is essential to have who has ownership of the company and its assets documented and formalized. The correct documents to prove ownership are especially essential in the case of multi-owner LLCs.
After getting organized with all the appropriate paperwork, you’ll need to analyze your finances to get a sense of whether or not you’ll qualify for the financing. While you’ll likely be putting the loan in your business’ name, as the business owner you will still be required to sign a personal guarantee — putting you on the hook to pay off the loan even if your business were to fail. Consequently, credit score will be a massive factor in determining if you qualify. Thankfully, now there are many different places you can go to see your credit score for free. Generally, banks are looking for minimum scores in the high 600s for lenders to qualify for a small business loan.
A couple of other components that will play a role in your qualification are your debt-to-income ratio (DTI) – which is what you make monthly in relation to your monthly debts (if you make $100 a month and your monthly bills are $35, your DTI is 35%) – and your loan-to-value (LTV), which is the amount of the loan compared to the value of what you are using the loan on (If you get an $8,000 loan to use on a $10,000 piece of equipment, your LTV is 80%). For LTV, aim for 80% or less; as for DTI, ideally, a value of 35% or lower will increase chances of qualification.
3. Find the Right Banking Partner
You know what you’re borrowing for and you know you have a good chance of qualifying for financing, so now it’s time to pick a bank. Regardless of what kind of financing you are looking for, there will be a wide variety of options available. Look for a financial institution that meets the needs of your kind of business. For example, if you are on the move at jobsites all day and don’t have time to go into a bank regularly, consider a banking partner that doesn’t require its borrowers to be in-person at a branch to originate a loan.
Compare the rates at a number of different institutions, and also consider the fees associated with each bank. Rates and fees should be easily accessible on the bank’s website. If you come across a financial institution that does not disclose their rates on their website, stay away from them. If they’re hiding the rates, there’s likely a reason for it.
That said, do all of your research before you begin applying for loans. Each time you apply for a loan it triggers a credit inquiry. Having several inquiries over a short period of time will hurt your credit score, hindering your chances of being approved down the line.
Applying for a loan is usually a pivotal moment in the life of a business that most owners will have to do at some point. When it’s time to take that step to help improve your cash flow or provide a much-needed safety net to help your business survive and thrive, keeping the above considerations in mind will set you on the path towards being approved.
