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Essential Business Loan Qualifications You Need to Know

You’ve decided to expand your business. You’ve hired more employees, launched a new marketing tactic, and have started to widen your market. But in order for your company to truly grow, you need to have sufficient working capital so you can buy equipment, supplies, and even lease a new office. There are many options available for business owners but in order to get the financing you need, you must know about the business loan qualifications that most lenders require.

Sound Business Plan

Your goal is to convince the lender (bank) that you are a serious business and by writing a thorough, well-thought out business plan, you’re able to achieve just that. It should also clearly explain how you plan to use the proceeds of the loan.

Good Credit Rating

If you want your loan to be approved, you need a really good credit history. Find out what your FICO score is because lenders always consider it one of the most important business loan qualifications. That’s because it gives them a good idea of whether or not you are a credit risk or if you are financially responsible. It’s also an element that determines how much credit they can extend and what the appropriate interest rate will be.

Comprehensive Financial Statements

Financial statements refer to your profit and loss statement. Lenders check the accuracy and integrity of your financial statements because these documents are key indicators of how well your business is doing and if your profits can actually enable you to pay off your loan. If you have a very low profit margin, it may be better to apply for microloans to increase your chances of getting approved.

Attractive Personal Resume

Small business lenders also look into your “personal character” so they can assess whether you are trustworthy and will not run away from your responsibilities. Your personal resume should therefore be compelling and convincing. It should include your work history and should distinctly highlight your skills, talents and professional achievements over the years.

Solid Marketing Plan

Having a great business plan is great but it won’t mean much to the lender if you do not have a marketing plan. What is your vision for the next 2-5 years? How do you intend to fulfill your objectives? What marketing strategies do you plan to use? Lenders will want to know how you plan to achieve your goals because these things will help convince them that granting you the loan makes good business sense.

Applying for a business loan has become more difficult through the years in spite of the fact that there are many financing options available to small business owners and entrepreneurs. According to the National Federation of Independent Businesses, in 2010, 15% of small businesses did not apply for bank loans because they believe they would only be turned down by lenders. If you consider that there are approximately 28 million small businesses in the country, that’s a considerable number. If you need capital resources and you believe you don’t meet the standard business loan qualifications, you might want to consider other financing alternatives such as invoice factoring.

How Factoring Companies Can Help Your Business

When it comes to funding, more and more small businesses are choosing alternative means of obtaining funding instead of relying solely on a bank loan. Among these financing options, factoring companies are being approached more frequently nowadays because they offer several crucial advantages that banks do not.

Boosts your cash flow quickly. This is perhaps the most common reason why businesses approach factoring companies. They may not have enough cash resources to cover payroll, fulfill an order, or buy equipment necessary to operate.

But factoring companies can offer 80% of the value of accounts receivable right away, instead of making you wait a month or two for your customer to pay up. The rest of the money comes to you when the customer pays the factor in full, and it’s from that payment that the factoring company deducts its fees.

The quickness of this solution is a vast improvement over bank loan applications, which takes an interminable time to complete. And when you need more money, you have to apply to the bank again. In factoring, you can get your advances regularly over the length of the factoring contract.

The terms are dependent on your sales. Essentially, you don’t get in trouble borrowing money without having the resources of paying it back on time. In factoring, it’s all about your customers’ ability to pay on time.

You don’t go into debt so you’re not tied to paying fixed amounts every month. Instead, you can get your funding according to the amount of sales you rack up per month. And in some factoring agreements, you can pick and choose which accounts receivable will be factored. So if you only need a certain amount of money, you can just submit enough invoices to cover it. You don’t have to submit all your accounts receivable for factoring if you don’t want to.

You get extra services. Factoring companies offer important services which you may need and which are not available when you get a bank loan. For example, factors investigate the credit worthiness of your customers, so advance rates and fees may differ depending on your customer. You may even have customers that your factor won’t consider. This means you get a more accurate picture as to which of your customers are more creditworthy.

Another crucial service is collection. Many factors take responsibility for the collection of the payment, and this frees you from having to set up a department for this function. In fact, the factor may monitor your invoices for you, and tell you which ones are due for the coming week. They can do this for you so you don’t need to hire additional personal for these tasks.

Basically, factoring companies can help you eliminate the distractions in your business. This allows you to concentrate on more productive business activities that are more suited for your skill set. It’s easier to focus on selling your wares and services if you’re not worried about your cash flow and your receivables.

Purchase Order Financing Process: How It Works

It can get a bit frustrating trying to jump through all the hoops required by your bank before you get the loan you need to fuel the stability and growth of your company. This is especially true if you have a customer with a huge purchase order that gives you massive profits, if only you had the cash flow to fulfill the order. But there’s a way to use the purchase order as collateral to get the funding you need and this purchase order process of financing is actually quite simple.

You get a purchase order issued by your client, but you don’t have the resources to fulfill the order. So you approach an alternative lender to avail of purchase order financing. Generally, the lender checks that you have the ability to provide what’s needed (at a profit), and that the customer has a good reputation.

What this means is that you don’t have to spend too much time during the financing application process. And if you have a government contract or a large reputable firm as a customer, it speeds up the process even further.

Once the financing company agrees to fund the purchase order, they will pay your suppliers on your behalf. This may be in the form of cash, letter of credit, or a guarantee. Your supplier can then trade with you in full confidence that they will be paid for their services.
Your supplier then ships the goods, you deliver the order to the customer, and then you provide the invoice. You then send a copy of the invoice to the finance company along with the proof of delivery.
Usually, the invoice goes through a factoring process, in which you get a percentage of the value in advance from the lender. That means you may get about 80% of the value of the invoice right away, so you can use them for your most important expenses. The rest of the money is held in reserve by the lender.
Once the customer finally pays in full, the finance company sends you the rest of the payment, minus the fees for the purchase order financing service. These fees depend on a lot of factors, such as the amount of money to pay the suppliers and the length of time it takes for the customer to settle what was owed.

It’s such a simple process, but it works. You can get the funding you need without wasting too much time, and you don’t even have to actually borrow money. The purchase order process enables you to accept large orders without having to disappoint your customers or make your suppliers unhappy.

What this means is that you’re no longer limited to bank loans to secure the growth of your company. Even if you don’t have the credit and the collateral needed for a loan, you can still get the capital you need a lot more quickly.

How to Choose a Staffing Factor

Factoring today is one of the most popular forms of financing. It’s essentially a very effective way to make use of your accounts receivable (AR) to get the funding you need much more quickly. But a staffing factor needs to bring more to the table than just what a generic factor offers.

Factoring involves the sale of invoices for hard cash (or for a line of credit). You get about 80% of the value of the invoice right away instead of waiting for the invoice to mature in 30 days or more. The rest of the value of the invoice is sent to you (minus the fees of the factor) once the customer pays in full.

Here are some ways for you to find the most suitable staffing factor for your company:

Lower fees. Regardless of what industry you’re in, this consideration is crucial. The fees may range anywhere from 2% to 6% of the value of the invoice, and this can seriously cut into your profit margins.

Then you also have to consider additional fees, such as startup fees along with penalties should your customers fail to pay their accounts on time. A staffing factor should make allowances for the time needed for your customers to pay, so you don’t pay additional fees unnecessarily.

Higher advances. The factoring advances usually come to about 75 or 80 percent of the value of the invoices. But for a staffing company like yours, a higher percentage for the advance can be very useful.

You need a lot of working capital to run your business, and the payment model with your customers usually becomes a hindrance. For example, it’s not unusual for your customers to take 60 days to pay up, and that means you’re going to have to use up your cash reserves paying your employees for 8 weeks. The weekly payment schedule for your employees, versus the 60 days needed by your customers, is the most common cause of working capital shortage.

Then there are also the growing difficulties in getting more workers due to low unemployment. You’ll have to spend more money in advertising to get more workers, because so many workers prefer working full-time for a company.

Add the various taxes and insurance payments you have to meet, and the need for ready cash becomes apparent.

Faster services. Factoring companies are famous for the speed in which they approve (or decline) funding applications. But some factors are truly faster than others. While some may take a week to approve an application, others only need 24 hours. For a staffing company in desperate need of cash to cover payroll by the end of the week, even a few days’ delay can have terrible consequences.

It’s the same problem when the factoring line is in place and you need to get your advance quickly. Some factors need a few days before they can give you the advance. But others offer same-day financing.

The top staffing factor may also provide additional services. But for a staffing company, the quickness and the amount of the advance they can get, along with the cost of the services are the most important considerations.

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What Is Sub-Debt Lending?

When your business files for bankruptcy, your debts fall into some sort of hierarchy. The tax people must be paid first, and then there is also the senior debt level. Only when your debts to these organizations have been fully paid can the subordinated debt (the lowest level) be paid. From this perspective, it’s easy to see why lending money to businesses is a very risky proposition for a lender. This is why many lenders offer subordinated lending, or just sub-debt lending.

Who Offers Sub-Debt Lending?

The most typical source of sub-debt loans are subordinated debt funds. Since the loan is much riskier for the lender, the interest can be considerably higher than with traditional bank loans. These lenders look for specific signs in your business before they will agree to provide sub-debt lending.

The loan is mostly short term and is given if you need it for growth.
Your business should have some type of asset which can be financed, such as valuable patents, popular intellectual property, or accounts receivables.
Your cash flow should be stable, or at the very least there’s a very strong possibility of more than sufficient cash flow.
You have a very profitable company.
Your records and financial controls are solid.
Your company is free from any performance obligations.
Modeling and forecasting are already in place.
You’re willing to accept reporting disciplines and financial covenants imposed by the lender, and you’re also willing to be a guarantor of the loan.

Basically, your company should have proven management and financial strength, along with a significant growth potential. The sub-debt lenders are willing to take the risk, but there should be a sizable return for everyone as well.

Benefits and Drawbacks of Sub-Debt Lending

In some ways, sub-debt loans may be more preferable than the alternatives. For example, while this form of funding may be more expensive than traditional loans, in the long run it’s still cheaper than if you sell a slice of your company to an investor. If your company grows to unprecedented heights, then the value of that slice you sold would be much more than what you got as a loan.

Usually, the interest payments on subordinated debts are also tax-deductible, and that reduces your taxable income. Your equity position may also improve, as a bank may consider it as part of your equity in service of the senior bank debt.

The main drawbacks to sub-debt loans is that you will have meet the interest and principal payments as part of the contract, no matter what your current finances may be like. You may also have to deal with some imposed restrictions on what the company and the management can do. And you may also have to put up some collateral for the loan, and this may include your personal guarantee.

But if you have the “signs” that sub-debt lenders are looking for, then perhaps sub-debt lending can be the answer to your capital problems.

Medical A/R Loan

When you’re a small business owner and you apply for a loan, in general the bank will be asking if you have anything that can serve as collateral. If you run a medical clinic, you don’t usually have much when it comes to the usual assets. You don’t have any real estate and you usually don’t even own the medical equipment in your clinic. But you do have accounts receivable, and you can use that to get a loan. With a medical A/R loan, you can then get the money you need much more quickly.

Medical A/R Loans

So how does a loan like this work? Essentially, you get a loan depending on the value of the invoices you issue. If you sell medical equipment, then the value of the loan is limited by the value of the invoices you issue to hospitals and clinics. This kind of funding is called invoice discounting.

In a typical case, the loan is actually a line of credit so you can use it like a credit card. The limit is a percentage of the value of the accounts receivable you use as collateral, such as 80%. You can withdraw from the line of credit as you need the money, and you pay interest on that money. The interest depends on the lender and the agreement you draw up—basically it depends on your company’s stability and financial health as well as the creditworthiness of your patients or customers.

As this is a loan, you may be required to collect the money owed to your clinic yourself. But your lender may insist that when you get paid the money must first come to them right away. The fact that this is a loan will also influence your credit rating, and may also affect how you get a bank loan in the future.

Factoring as an Alternative

Medical factoring is not a loan at all. Factoring is the sale of the accounts receivable instead of using them as collateral. You get an advance of perhaps 80% of the value of the accounts receivable, and then you get the rest when the customer or patient pays up in full. The factor gets their fee from this payment before they send you the rest of your money.

With factoring, the application process is much quicker. That’s because your financial health isn’t really much of a concern at all for the factor. That cuts down on the paperwork, and in many cases the approval for the funding can come in only a few days.

What’s truly relevant is the trustworthiness of the customers. For medical factors with extensive experience in the industry, usually they already have a list of insurance companies with whom they have a cordial business relationship. That simplifies the collection process because the factors are usually responsible for the collections. So with medical factoring, you won’t have to bother setting up a collection department of your own.

Small Business Loans for Restaurant Business

Opening a restaurant is one of the most common small business ventures because it seems simple enough. Instead of working daily to feed your family, you can just expand it a bit and feed hordes of people with the meals you prepare. People need to eat after all, right?

But then again, you’ll find that running a restaurant business is not really that easy. Funding for startup restaurants is going to be a problem even right at the start, and when you’re getting your stride with your operations you may stumble every now and then due to problems about marketing and customer interest, supplies, and equipment. Even choosing a location for your restaurant can be a challenge.

So how can you get small business loans to finance your restaurant? Here are some ideas:

First of all, you need to demonstrate your confidence in your eventual success by using your savings on your restaurant venture. About 80% of all startups are at least partly financed by the founder’s savings. Others also use their credit cards as well.
Then you can approach your family and friends. About a third of all startups go this route. Aside from wanting to see you succeed, people close to you may also enjoy the idea of a family restaurant where they can hang out.
You can then apply for an SBA-backed loan. The local SBA office can give you a list of nearby banks which have a history of lending to restaurants.
There are several main requirements you’ll have to meet first though, if you want to get a loan from a bank. You’ll need to prepare your paperwork, and that includes a comprehensive business plan. You must have an excellent credit rating and preferably some experience in the industry.
In all likelihood, the bank will also ask if you can get a second mortgage on your home.
If you own the restaurant property outright, you may use that property as collateral for your loan.
You can also use your equipment as collateral if you own them outright.
You can also try to get some alternative funding sources, such as factoring or merchant cash advances. For example, you can get a $10,000 loan, and the lender can then get 10% of your daily credit card revenues until the loan and the interest is fully paid up.

The advantage of this repayment schedule is that it accounts for any seasonal changes in your sales. So even if you’re undergoing a period of disinterest from customers (maybe you cater to students and it’s the holiday season) you can still surely make your loan payments.

The main drawback here is that the percentage will be taken from the sales no matter what, so you risk not having enough money left to pay for utilities, rent, inventory, equipment maintenance, and payroll.

Running a restaurant isn’t easy. But with a good location, great food, nice ambiance, and superb service, you can actually succeed only if you have enough money operate the business smoothly.

Should You Use a Factoring Service That Charges a Factoring Broker Commission?

It’s not always easy to find the best factoring company to cater to your financing needs. There are so many of them online, and taking the effort to choose the best one among them may take a bit of time. But one alternative is to contact a factoring broker who can enable you to choose a factoring company very quickly.

Pros of Factoring Brokers

There are several advantages of using the services of professional factoring brokers.

Brokers can help you find a factoring company very quickly. You won’t have to go through a long list of factoring companies to deal with.
Factoring brokers can explain the factoring process used by a factoring company in great detail. Brokers can describe what you can expect from the factoring service, and the factoring company can start setting up the deal more quickly.
As the recipient of the funding, you don’t have to pay the factoring broker commission. The payment comes from the factor instead. Usually, this is 10 percent of the amount you pay to the factor in fees.
Factoring brokers know which factors deal fairly with them. Some factoring companies take some money off the top of the fees first before they pay the percentage first. And if a factoring company deals unfairly with people who bring in clients, then they may also be more likely to deal with you unfairly as well.

Cons of Using Factoring Brokers

Factoring brokers want to make money, and sometimes this may be to your detriment. For example, typically a broker is paid the 10% as long as the factoring agreement is in place. So that may mean that the broker may want to find a factoring company that can serve you over a two year period (via a lock in contract), even though you only need the factoring for a few months.

The factoring broker also earns more in commission when the factor charges a bigger fee for their financing services. As such, they may get a factor that charges extravagant fees for your company, instead of a factor which offers more reasonable fees for its services.

Because brokers may want to earn more money from their clients, they may have minimum requirements for factoring services. For example, they may only lead you to factoring companies that require a 2-year locked-in period. The brokers may also only recommend factoring companies that charge 6% of the value of the accounts receivables as the fee, even though some factoring companies only charge 2% as a fee.

Conclusion

The quality of the factoring company chosen for you by a broker depends on what kind of broker you have in the first place. Some brokers prioritize offering the best service for their customers, so they pick the factors which offer the best services or the lowest rates. These brokers hope that by providing superior picks, clients may recommend their services to their other business contacts.

The other type of broker operates by trying to get the most money out of each deal. They prioritize their own profits and your needs come in second. This is the type of broker you should avoid.

Popular Misconceptions about Purchase Order Finance

Most people who own credit cards and pay mortgages are quite familiar with how loans work. You borrow money, and then you pay the lender each month for the principal amount and interest. It’s very straightforward. Sometimes you may have to put up collateral, and this is called a secure loan.

But for many businesses nowadays, traditional loans are no longer reliable as a source of funding. This has made alternative forms of financing such as purchase order finance very popular. Unfortunately, there are still a lot of misconceptions going around about it. So let’s take a closer look at these misconceptions and add some clarity to the discussion:

Purchase order financing is hard to get and takes too long. Just because traditional bank loans are actually time-consuming and hard to get does not mean non-traditional lenders do things in the same way.

Another reason for this misconception is that lenders are not interested in your company’s stability and your ability to pay the loan. Instead, they’re interested in the customer’s (the one who’s making a purchase using a PO) stability and ability to pay the purchase order. The lender is also interested in the capabilities of your suppliers, and of course your ability to fulfill the order is looked into as well.

Although that seems like a lot of investigative work, the truth of the matter is that it only takes two weeks or so before a lender can grant or deny your request. That’s in stark contrast to how banks work, which can take months.

Purchase order financing comes with inordinately high interest rates. Admittedly, the cost of this type of financing is more expensive than what traditional bank loans charge. But the fees are always low enough that you will still gain a nice profit when you fulfill the purchase order.

The interest rate may be more similar to credit cards or to the interest rates charged by banks to high risk borrowers. That may be high, but at least you can fulfill the purchase order.

You need high value collateral. Now this is absolutely not true at all. In fact, it may seem as if the purchase order, after it has been verified, is enough to secure the loan. No other collateral is

necessary. It’s actually the absence of collateral which makes this type of financing so appealing to many companies.

Only shady or unstable companies make use of purchase order financing. The truth of the matter is that with banks so reluctant to lend money through traditional loans, a lot of perfectly reputable companies are availing this type of financing.

One recent example is Nate’s Food Co, which just got a $3 million purchase order financing in November 2014. And this company isn’t shady at all, as it is valued at more than $2.15 million.

So before you dismiss purchase order financing as an option, do your homework first. It may help you get the money you need to help keep your company afloat.

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What is Inventory Finance?

Retailers and wholesalers don’t always find it easy to get financing for their business. Banks are not always the most ideal lenders. And besides, their loan application process can be long, complicated, and ultimately futile.

Small business loan applications to large banks have dipped to an approval rating of just 20.4% in October 2014. Even smaller banks have become more recalcitrant in giving out loans, as the approval rating for loans has dropped to 50.3% in September 2014.

So it’s always great when several forms of alternative financing are available. One of these is inventory finance.

What’s Inventory Finance?

When you borrow money from a bank so that you can purchase inventory, it may be hard to secure a loan if you don’t have any notable security or asset to serve as collateral. With inventory finance, you don’t have to have these assets. The inventory you buy with the loan amount you will receive will serve as the collateral for the loan.

In some cases, you may already have the inventory in hand, and you use that inventory as collateral while you use the loan for another purpose. You may increase your inventory to meet an increase in demand, improve your delivery services, or hire more workers.

Types of Inventory Considered

Once you sell your inventory, you can then pay back your lender with the money you’ve received. The loan in other words acts like some sort of advance against the value of your inventory. If you are unable to sell your inventory, then the bank takes the inventory instead.

Of course, the bank will have a problem when this happens. If the inventory is not selling, then the bank may not get back its money.

Thus, there are conditions as to what kinds of inventory are approved for this type of financing. One possible condition is that the inventory should be very popular and easy to sell. The demand for the product must be high, so that the bank can be assured that the inventory will sell after all and the loan can be repaid.

Another possible condition is that the item should also have a steady clientele. For example, if your inventory is bought by the same people on a weekly basis, then financing may be possible. So if you’re the only gas station in a town where there are a lot of cars then getting this type of financing is going to be very easy. That’s because you (and the lender) know that your items will sell quickly and steadily.

Advantages of Inventory Finance

One of the first advantages you’ll notice when you apply to a lender that offers this type of financing is that the approval period can come very quickly. It will take just two weeks or so, which is fast compared to bank processing times.

This type of financing is ideal when your supplier expects payments in a shorter period of time than it takes you to sell your inventory. If your supplier expects payment in a week while it takes a month to sell your products, then the loan can come in handy to pay off your supplier.