How To Secure A Business Loan For A New Business

As you start to plan out your new company, you might want to think about securing a business loan. 

This financing option can help take the pressure off of starting from scratch and even fund an entire year of operations. 

However, it isn’t as easy as just walking into a bank and asking for a business loan. 

You will need to think about how much money you may need from the loan, what type of collateral you have access to if needed, and what type of financial statements are available for the business in question.

What Types Of Loans Are Available?

The first thing you need to do is learn what your options are before applying for a business loan. 

Business owners have several different types of loans to choose from, and a few factors will determine the one that works best for your business. 

You might want a secured loan, which gives you access to money using collateral like equipment or real estate. 

Another option is an unsecured loan, which won’t require any collateral and will depend on your credit score alone for approval. 

Or perhaps a loan guarantee would work out best for your company needs, giving you access to funds without personally borrowing the money yourself. 

There are even some loans that are combined, such as a combination of secured and unsecured loans.

How Much Money Will You Need?

You might need to invest in a large chunk of equipment that can’t be financed or paid for all at once, but that doesn’t mean you won’t need a loan. 

You will need money for business start-up supplies like furniture or marketing materials, and you might want to throw in some additional funds for living expenses while you get started. 

It would be best to think about your operating budget, including rent, utilities, employee salaries, and more. 

You may also want to set aside some funds for operating reserves that can help keep your business afloat through unexpected challenges.

What Collateral Do You Have Access To?

Secured loans require some tangible assets like equipment or property to be used as collateral. 

You will need to make sure that you can secure the loan if you cannot pay it back. 

This might be a good option for businesses that already have the equipment but don’t want to use it as the primary source of funding for the company. 

It is also possible to use your assets as a type of security, such as your house and car, so you should understand the risks and rewards before making this decision.

What Type Of Financial Statements Do You Need To Present?

If you need to secure a business loan, you will have to provide your lender with some financial statement. 

This could be in the form of a balance sheet, an income statement, or a cash flow analysis. 

Based on the type of loan that you are applying for, your lender might require one financial statement or all three for approval. 

It is essential to understand how these statements work to present them in the best way possible. 

Other Factors For New Businesses Need To Consider

Cash Flow

Cash flow is the lifeblood of a business.

It’s a term used to describe how quickly a company can turn its cash into profit, and it’s one of the most critical indicators when looking at financial health. 

But what does cash flow mean for your business, and why is it so important?

First, let’s look at what precisely cash flow means in numbers. Cash that comes into your business each day, minus money going out each day, equals your revenue. 

Revenue minus expenses equal profits (or losses). The speed at which you can turn this profit back into cash (or reduce losses) is known as your cash conversion cycle or time-to-cash cycle.

The cycle started at the end of the month when you recorded your sales for that period. 

You collect your customers’ payments after that and deposit them into your bank account. The amount of money you’ve collected minus the amount of money you’ve spent equals how much cash you have leftover that you can use to do business in the next period. 

That leftover cash is what you use to fund operations during the next month (or pay vendors if the business is done on credit). 

At the end of that month, you collect more revenue, get more cash flow from customer payment, and repeat the process.

Why It’s Important

The length of this cycle is what separates healthy businesses from weak businesses, and strong cash flow can help you weather times when there isn’t enough revenue coming in to fund operations. 

This is why you hear about start-ups taking out loans or turning to investors for funding – the business needs more money than they’re earning, so they have to get it from somewhere else if they want to continue operating. 

Strong cash flow positions a business for growth over the long term.

Invoice Financing Could Be An Option

Invoice financing is a type of vendor financing that allows buyers to order products or services before payment is due. 

The lender will usually verify the buyer’s creditworthiness and then advance funds to the supplier, who pays the invoice.

However, there are some risks for the buyer as they may have to account for late payment charges if they don’t pay on time.

It is most commonly used in the manufacturing or construction industries and can be helpful for businesses who need to buy equipment, raw materials, or other long-term assets.

If you need to finance your invoices, you can often arrange to finance for up to 100% of the invoice amount. Some lenders also provide the option of receiving more minor advances frequently rather than one larger loan that you must pay back within a few months.

Since no payments are due until after delivery or installation, invoice financing is also called deferred payment or deferred delivery. 

This type of financing is often attractive for buyers of large machinery like refrigerators or air conditioners, for example, who need lots of cash to buy the product and can’t wait months to get paid regularly.

Some companies use invoice financing to acquire capital quickly; however, many traditional lenders have begun offering buyers other types of working capital, making deferment less necessary.

The Importance Of Invoicing

Invoice management is a must-have in any small or medium-sized company. 

It’s the backbone that all successful businesses are built on. But what is it, exactly? What good does an invoice do for your business? 

It deals with money and, more importantly, cash flow, which, as we have discussed, can make or break a company.

You would never know how much money was coming in or going out of your business account without invoicing. 

Your employees would never get paid, and you wouldn’t have their information to pass along to the government at tax time.

There is specialist software that exists to make invoicing a breeze, such as Payt.

This kind of software allows you to start with a much smaller team, saving you money at the outset.

Utilizing features such as follow-up emails and debt management allows you or your accounting team to keep on target with collecting income.

Summary

Whether you are an individual or a corporation, your business needs to make a solid case to the lender that you will be able to pay off the loan by generating revenue.

However, by proving that you are a viable business and securing a loan, you will find your company gets off the ground far faster and more efficiently than if you had to bootstrap.