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Most business owners think that the best time to apply for a business loan is when there is financial need. However, some of the best times to apply is when you are expanding, expecting a rush, or needing to cover expenses for a slow season. When applying for a business loan, it is best to be as prepared as you can. Below we will explain common situations in which your business can reap benefits of a business loan and how to get started.
You are need to expand
A business loan can help you upgrade your physical space if it is getting to crowded. It can also help you upgrade your equipment or help add new hires to the team if you feel like your business needs to improve its efficiency and productivity.
You need a cash cushion
If your business tends to have irregular cash flow or slow seasons, it is time to apply for a business loan. This way you do not have to worry in the case you have a shortage of cash flow. Having a cash cushion can help you cover any unexpected expenses, avoid having to cut prices to move inventory, and much more.
To build business credit history
Building a business credit history is important for many reasons, the most important is for receiving a business loan with a good rate and with good terms. If you do not have a strong record, traditional lenders may not be wiling to give you the financing you need. Applying for a business credit card can help you begin building business credit as long as you make timely payments each month. Making your payments on time also benefits you because it helps you avoid interest charges.
To take advantage of opportunities
Getting a small business loan can help you take advantage of opportunities that may arise and that you cannot pass up. Be sure to thoroughly think about the opportunity and that it will be best for your business. When this happens, you typically need to look out for lenders that can provide quick funding.
To introduce a new product or service
If your business is ready to introduce a new product or service, you may need to take out a loan to help you cover the costs.
When to Avoid Taking Out a Loan
There are times when it is better to wait before taking out a loan. Below are some examples.
Too much debt
If you are already maxed-out on lines of credit, you may not want to take an additional loan out as it can drive you into default. If you have business credit cards that have high balances or other loans you are struggling to keep up with then it is not a good idea. Doing so could potentially increase your cash flow problems.
Uncertain purchase
If you want to purchase a new asset for your business but are not sure if you can afford it, reconsider the purchase, and wait some time until you can afford it.
How to Qualify for a Small Business Loan
Once you have decided if it is right for you to apply, consider the following requirements to help you qualify.
- Credit score: must have a good standing credit score of at least 680 or higher to qualify.
- Time in business: need at least one year to qualify for online small business loans and at least two years to qualify for most bank loans.
- Business revenue: lenders consider how long you have been in business. You need at least one year to qualify for online small business loans and at least two years to qualify for most bank loans.
- Payments: evaluate how much you can afford to make monthly repayments. Some vendors may even require daily payments so you must factor that if that is the case.
Documents Required for Applying
If you find that you qualify, you need to compare your options and apply for the loans that fit your needs. The documents required depend on the lender but some of the basic documents you will need include:
- Business and personal tax returns
- Business and personal bank statements
- Business financial statements
- Business legal documents
The Bottom Line
It is important to be aware when the right time to apply for a loan is for your business. Do your research and shop around to compare lenders before deciding on that is the best fit for your business.
