Navigating a loan application can be a confusing process, but if you’ve got the right information, and mindset, it will help your business when the need is greatest.
Just ask Paul Kalra, founder of Hospital Connection, who spoke to the Toronto Star’s Jane Switzer about his experience applying for a small business loan to shore up payments to suppliers…
“If I don’t pay, they won’t continue to work for me.” he says. “The number one reason for me taking the loan was cash flow. Within a couple of weeks I felt a little better because I knew there was money in the business.”
He also provides a blunt assessment of what his fellow business owners might want to watch for… “you need to know that expenses are coming in the future, and that the money needs to be paid back.”
His tips for securing funding? Plan realistically, understand value, and listen to feedback from potential lenders.
Getting a small business loan is about more than your credit score
Lenders and banks meet with small business owners like Kalra on a regular basis – and while credit scores / ratings are widely understood as a big part of loan applications, there are other things that matter, too.
Alliance Bank, for example, offers traditional small business loans and places credit history at the top of their list to check on each application…but cash flow, revenue projections, available collateral, and the character of the borrower are also important factors. In fact, Alliance lists cash flow as the second most important factor when analyzing an application.
That’s good news for business owners / entrepreneurs, especially if your business is young and/or you are relying on your personal credit history to get a loan.
Using the cloud to prove cash flow, and revenue
The benefits of cloud computing for small business owners are often described in terms of money saved. But when it comes to a loan application, having a simple, powerful cloud solution can go a whole lot further.
If you avoid using older or overly complex software (and for some folks, Excel spreadsheets) you’re far more likely to accurately predict revenue and cash flow, minimizing your reliance on the powerful but often slow-to-build credit score.
That ability to quickly assess what’s happening in your business doesn’t just reduce your stress level, it makes you a more attractive loan applicant, too.
For example, if you’ve got $19k worth of inventory on-hand (which can be a liability to your loan application), being able to show booked sales of $15k for the next 45 days could act as a tipping point. Same goes for showing invoiced items that you are currently collecting on.
And if you’ve got automated accounting that syncs with your bank, you can also clearly demonstrate that your time will be spent getting new customers and keeping the ones you have happy, instead of dozens of hours poring over spreadsheets or trying to reconcile a credit card statement against accounts payable.
The evolution of online lending
But the cloud isn’t just improving cash flow & revenue projection, it’s also creating a new source of funding: online loans.
According to a recent survey by the Federal Reserve Bank of New York the number of small business owners turning to online lending is increasing, with 1 in 5 companies applying for a loan through traditional banking channels having also applied for a loan from an online lender. And the Harvard Business School points out that online lenders are the fastest growing segment within small business loans.
Eventually, online lenders may even find a way to sync up to your cloud accounting / invoicing / inventory, run your credit score, and quickly suggest loans / interest rates that fit you.
While online lending is making the loan application process easier and faster for business owners, you’ll still want to do your research, like Paul Kalra, since each lender relies on their own algorithmic blend to decide if you are worth loaning money to, and they’re not always transparent about the process.
One thing is clear: lenders care more about your business’ ability to grow long term and pay back the loan. As Kalra says: “If your business has some viability, you have to prove it.”
Being aware of cash flow and patterns in your purchasing, inventory, and accounting history not only creates accurate revenue projection, it proves your viability and makes your application an easy “yes” for lenders.