Whether you’re an established player or just starting out, your small business needs a steady stream of funds to stand any chance of success. Expanding into new markets, hiring more employees, or debuting a new product line can require additional capital. Small business financing can also help you ride out short-term market fluctuations. While you might not feel the need for extra capital now, the best time to secure business financing is when you don’t need it. Make sure you’re keeping an eye on your options, even when your business is in great shape.
All businesses should have access to an emergency line of credit.
You may be thinking, “Well, I’ve been around for X years and haven’t had an emergency yet.”
Even if your new business has been successful so far, there’s no telling what could happen in the coming years. Say your best employee leaves and productivity slows. Maybe a stellar office location is about to open up one town over and you want to jump on it before someone else does.
You should always have a credit line available for unexpected growth opportunities or short-term cash flow emergencies, and you will secure a larger line with better terms when your business is in good shape financially.
If there is a spike in sales and you need to quickly acquire more materials, you want to be well positioned to meet demand. With a credit line, you only pay interest on the funding that you use and don’t pay back on time each month — for some business owners, this can make a business credit card a cheaper option than a loan. You might also want to consider using business credit cards as part of your company’s emergency fund. Using business credit cards runs the risk of high interest rates and sizable fees, but they might be your only option if your business lacks substantial proof of assets to open a loan or line of credit. Business credit cards can often carry a lower interest rate than similar alternatives like a Merchant Cash Advance or Cash Flow loan.
You are more likely to get approved for financing when your business financials are in good shape.
Financing a small business is a risky proposition and lenders will be looking for any reassurances that this risk will be rewarded. Your financing request is more likely to be approved when lenders are more confident that you can repay the loan on time. Banks will evaluate you on several criteria, particularly the assets and reserves that you have available to pay off the loan even if your new venture isn’t profitable yet. They will also want to see solid cash flow that will be sufficient to repay the loan without putting pressure on your normal operations.
Your company’s success is directly tied to the financing that you can receive; the more capital you already have, the more capital that lenders are willing to give you.
You are more likely to get approved when your personal and business credit are in good shape.
Small businesses are also more likely to get approved for financing when their personal and business credit reports look good. If you wait until you are unable to pay bills and vendors, your credit will take a hit and it will be harder to get funding. Before beginning your search for loans, you should keep a close eye on both your business credit score and your personal credit score so that you can be realistic about how much financing you can receive.
Expect the unexpected. Think about financing for your small business when your company is having the most success. Lenders will look more favorably upon you if you have substantial assets in the bank and your credit history is strong. For the best chance of success, establish an emergency fund, and plan ahead to make sure a lack of financing won’t limit your company’s long-term success.
This article was originally written on October 16, 2015 and updated on February 7, 2017.