How to know if your business is ready for a loan
One of the many skills you will develop on your journey as a business owner is knowing when to seek investment. Do it too early and you could take on unnecessary debt, react too late and you could miss important opportunities.
So, how do you spot the right moment to seek extra financing? To help you identify the tell-tale signs, we look at some of the most common examples experienced by small businesses.
1. Your business is getting more inquiries than you can handle
If you are receiving more inquiries than you are currently able to fulfil, this is a key sign that you are ready to grow. But to justify your growth, you need to know the potential size of your market so you can decide on the next steps.
This is a good point to create a business plan for your expansion, covering your marketing, audience, and project revenue. Lenders prefer to see this type of detail, as it gives them more confidence in you as a borrower, demonstrating that you are thinking ahead and more likely to repay the loan in full.
2. You consistently deliver strong financial performance
Another pivotal metric lenders will look for is the financial history of your business. If you have a strong history of being profitable, this reassures lenders that you have a model that is likely to continue along the same trajectory.
The important thing is to avoid growing too quickly beyond your means, as this could harm your progression in the short and long term. Lenders tend to prefer growth at scale, as it suggests stability and predictability, which means there is a greater chance of the loan being repaid without issue.
3. You are not in urgent need of a loan
There is a clear distinction to be made between ‘needing’ a business loan and ‘wanting’ extra financing.
If you are delivering strong financial performance, it will mean you are seeking a loan to grow and expand your business. However, if business finances are tight, you may be urgently looking for a loan to reinforce your cash reserves, which may make some lenders nervous.
Bank small business loans are usually a better idea when things are going well, as you have more chance of sustaining long-term success when expenses are low and cash flow is high. Lenders also tend to offer more favorable terms to businesses who are in this position, which can make the repayments easier to manage.
4. You have a strong credit score
While it is not the only metric used to assess a loan application, your business credit score will have a central role to play. When checking a borrower’s credit score, lenders tend to look at things like:
- Your ability to pay bills and any outstanding debts
- Red flags like credit defaults or bankruptcy
- The value of the asset you are offering as security
In most cases, the more boxes you can tick, the more straightforward the process will be. However, even if you have a less-than-perfect credit score, you may still be able to secure a business loan.
Although interest rates tend to be higher on adverse credit loans, it is always in your best interests to be open and transparent about your borrowing history if a lender highlights any issues. They will eventually discover the truth, and it also helps to build trust with the lender.
5. You have a plan for how the loan will be used
Lenders need assurances that you are financially secure enough to repay any loan they green light. In addition, they will also want insight into how you intend to spend the funds.
Before you start your application, determine how much you need to borrow and where it will be spent. The bank will normally ask for information on the kind of impact or return the funds are likely to deliver, so take time to factor this in.
You can submit your loan request as a standalone proposal or include it in a broader business plan, depending on your current company status.
Final thoughts
Timing is key when it comes to seeking new finance for your business. Provided you are in-step with the demands of your business, you should have a good idea of when to make your move. The main thing to remember before taking on the responsibility of a loan is to ensure you are financially secure enough to manage the repayments, especially if you need to use an asset as security. The more prepared you are for a loan, the better, as it will give you a stronger platform to capitalize on your investment.