The Worst Time To Apply for a Business Loan

The Worst Time To Apply for a Business Loan

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Imagine this: You’re hard at work on your business, you’re growing and pouring more money into the development of your company. Times are busy, and more customers are inquiring about what you offer.

Suddenly, it stops. Your existing contracts are ending, and the rate at which new customers are coming in is dwindling.

If you’re not careful with your finances, a slow season can have cascading consequences. Less business means less cash flow and less cash flow can mean you’re utilizing more of your existing credit, or maybe you’re late paying one of your suppliers. Late payments lead to lower personal and/or business credit scores, making it hard to get financing when you need it most.

Why You Shouldn’t Apply for a Business Loan in Your Slow Season

As the saying goes, banks seem to only lend money to those who don’t need it. If you apply for a loan when your slow season hits, these are some reasons why you may be denied:

  1. You have less cash in the bank. When you apply for a loan from the bank, they like to see that you can cover more than your current debts. If you don’t have about 25% more in your account than the amount you owe, it’s going to be hard to qualify for funds from the bank.
  2. Monthly sales decrease. Lenders generally ask to see your monthly or annual sales to make sure you meet minimum requirements and to determine how much they will lend to you. After a busy season, your average monthly sales will be higher, allowing you to qualify for more funds. Wait until months into your slow season and you likely won’t qualify for the full funds you need.
  3. Less diverse customer mix. It’s not just about sales—a bank will want to know that those sales are coming from a mix of customers rather than one customer sending you all your business. During your slow season, if you’re relying on a couple big customers, a bank might discount that income when calculating your monthly or annual revenue.
  4. Personal credit scores go down. Are you using personal credit cards for business use? If you aren’t careful about how much debt you’re running up on personal cards, it could be having a negative effect on your personal credit scores. A hack that can help with this is making sure you have money in the bank to pay down your balances each month before your credit card provider reports your payment to the credit bureaus.
  5. Business credit scores go down. It’s hard to meet payment deadlines when your business isn’t bringing in the same amount that it was in the prior months. But payment history is the largest factor affecting your business credit scores, so being late on a payment can have a large negative effect.

The solution? Consider setting up an emergency fund for your business now — put aside a certain amount in your bank account to cover the bills when the busy season is over, or get a business line of credit to pull from in case the amount in your account gets low.

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No Emergency Fund? Options to Consider

Here are a couple options for you to consider if you lack an emergency fund and you’re in a pinch.

  1. Invoice financing. When there’s a lag between when you provide a product or service and when you get paid for it, invoice financing can help. How it usually works is an invoice financing company will fund a portion of your invoice now (usually takes hours or days), and the rest — minus a factoring fee — when the invoice is paid by the client later. Instead of looking at your credit and business finances, the invoice financing company will usually care more about the financial health of your client.
  2. Short term loans. When you expect business to pick up soon or need to finance a lucrative opportunity, short-term loans can be an option. The requirements to qualify are less stringent than a bank, and the underwriting is faster, allowing you to secure funds in days. This option is generally more expensive than longer term loans or a loan option from a bank.
  3. Business credit cards. Credit cards for small business allow you to build credit in the name of your business and safeguard your personal credit. If your personal credit is strong, you might consider applying for a card that has a 0% intro offer. This allows you to make purchases and carry a balance on the card for a number of months without paying interest. Business credit cards usually offer an instant decision and if you qualify you’ll get your card in a couple weeks. Make your minimum payment each month to protect your credit.

Related: Best Business Loans of the Year

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About the Author — Lydia serves as Content Manager for Nav, which provides business owners with simple tools to build business credit and access to lending options based on their credit scores and needs.

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