Applying for a line of credit or loan can be a common, significant step for a business that wants to support its growth. There are several factors to consider when deciding which loan type you need and how and where to secure additional capital to ensure you choose the right tools for your business. Here are five questions to consider before applying for a line of credit or loan.

#1 What Are Your Business Goals?

Before applying for additional funding, you must have a clearly defined business plan outlining your goals, strategies for achieving them, and how securing more capital will help you reach them. You’ll need to demonstrate to lenders that you have a solid growth plan and communicate why you need the money and how it will be used, such as assisting with expanding into new markets or launching a new product.

#2 Which Type of Loan Should You Choose?

There are several funding options, so understanding your needs and how each type of solution functions will help inform your decision. For example, a line of credit is a flexible option but is it the right choice for your business and goals? Depending on your circumstances, you may consider an asset-based line of credit, bridge loan, or other type. You may consider factors like:

  • Do you need short- or long-term funds? A line of credit, similar to a credit card, may be suitable for businesses with short-term capital needs or fluctuating cash flows that need funds to keep operations running smoothly. They may use a line of credit while awaiting payments to fulfill payroll or purchase more inventory. On the other hand, you may require a loan for a larger, one-time investment, like when purchasing new equipment.
  • What are the costs? Compare terms, interest rates, and repayment requirements of different kinds of loans. You may also consider how your business’s financial health will contribute to these terms and available options. For example, a bank may have more stringent criteria when approving a loan or higher costs.
  • Are there other ways to fund your needs? Explore different ways to free up resources to meet your needs or alternative solutions like an asset-based line of credit or invoice factoring that will cover a temporary gap in your cash flow. It’s a common pitfall not to shop around when securing additional funding, which could lead to missed opportunities and unfavorable terms.

#3 How Much Do You Need?

Determining how much you really need for your goals is crucial to avoid over- or under-borrowing and unnecessary fees. Over-borrowing is tempting when the capital is available. Still, you want to be sure only to borrow what you need so you don’t run into financial strain or more severe situations like bankruptcy. It will also help you set realistic repayment terms for your income needs. Here are steps to help you get started determining the right amount:

  • Build out a detailed budget that will support your goals and initiatives.
  • Ensure you can realistically repay your loan or credit in the given timeframe. You may find it beneficial to be conservative in these estimations to ensure your cash flow and revenue align with your repayment obligations.
  • Consider requesting funding based on specific milestones or projects so you don’t over-borrow when you don’t necessarily need the funds.

#4 What Are the Loan Terms?

Every lender defines its loan terms and requirements. It’s not uncommon for borrowers to overlook hidden fees, escalating interest rates, and unfavorable terms. Before signing anything, you should thoroughly understand these terms to ensure you’re not subject to unnecessary expenses or penalties later. Be sure you know the answers to these questions:

  • What is the interest rate? Understand if it’s fixed or variable and how it will affect your repayment.
  • What is the repayment time frame? Understand the payment schedule, the loan’s duration, and if it’s doable for your business. If you don’t want to commit to significant debt or a long-term loan that may create additional financial headaches, you may consider a shorter-term solution.
  • Are there any restrictions? Read the fine print to ensure you’re using the funds correctly and meeting all requirements outlined in the loan or line of credit agreement. For example, are there penalties for paying off the loan early? Clarify any questions you have with your lender for total transparency.

When exploring your options, a lender should walk you through everything available, such as innovative solutions like an asset-based line of credit. These agreements can come with fewer restrictions that provide you with more agility, flexible repayment terms that match your revenue cycles, and competitive interest rates.

#5 What Documents or Collateral Do You Need to Secure a Loan or Line of Credit?

Another essential step in securing a loan or line of credit is to gather all necessary documents and collateral, if required, during the application process. Here are typical items you may need and other factors lenders may review:

  • Financial records demonstrating your business performance, including tax filings, income statements, balance sheets, and cash flow analyses.
  • A business plan outlining your goals and how you intend to use the extra funds to reach certain project or growth milestones.
  • Collateral is required for some loans and could vary from equipment to real estate. Keep in mind the value of your collateral may impact the amount you receive. For example, you may consider putting up personal collateral to improve your approval chances but also be at risk of losing those assets if you have difficulties repaying the loan. You should discuss all forms of collateral and alternative solutions with your lender. Options like asset-based lines of credit use your existing assets (e.g., inventory or accounts receivable) as collateral, which can help companies with varied credit profiles and startups overcome rigid credit requirements. 
  • Credit worthiness often plays a critical role in loans, especially with banks. Alternative lenders may review other criteria like growth potential and other factors when providing funding, which may be more suitable and flexible for companies with poor, no, or limited credit history. 
  • Lenders will also look at your debt-to-income ratio to ensure you can repay the loan within the defined terms, given your existing income and liabilities. Loan approval criteria vary, so it’s essential to work with a lender that understands your needs and looks at your total financial picture and potential when providing a loan.

Navigate Business Financing with Confidence

With so many options and factors to consider, business owners must advocate for themselves and their businesses. By reviewing these considerations, you can more confidently navigate the process of applying for a loan or line of credit and make more informed decisions. We encourage you to look beyond traditional options in your search, considering alternative options that better fit your situation and give you more control over your finances.

When seeking lending solutions, prioritize transparency, customization, unbiased guidance, and education. Ensure you fully grasp the terms and obligations before committing to any agreement.

We hope these insights empower you to secure funds to fuel growth and mitigate risks. If you need assistance exploring financing options, we’re here to help guide business owners through alternative solutions tailored to their needs. Contact us today to learn more.