Common Mistakes When Applying for a Working Capital Business Loan

If your business needs to expand, you’ll most likely need a financing solution to make it happen. But whilst there are definitely plenty of banks advertising their loan products to small business owners, they have narrowed their lending requirements making it increasingly difficult for people to acquire a working capital business loan.

Here’s a list of mistakes often committed by entrepreneurs and small business owners when applying for a loan. By being aware of them, you may increase your chances of getting the capital resources you need so your business can grow.

  1. Lack of planning

This particular mistake is actually quite broad because there are many aspects throughout the loan application process that a business owner fails to plan for properly. It begins with knowing if they really need the loan or not. They need to determine if spending an extra $100,000 for a new office space and furniture will be good for their business or if they can make do with the old furniture and tighter space for the meantime.

Planning is also essential prior to actually submitting a working capital business loan application. In order to be taken seriously by the lender, the borrower should have a comprehensive business plan that clearly explains his vision for his company, a marketing plan and how he intends to utilize the loan proceeds.

Preparing financial statements and other business loan applications is also necessary before you should approach a bank and apply for a loan. With sufficient preparation, it is more likely that you will get approved for a capital loan.

  1. Being pressured into making a decision

Banks (and basically all kinds of lender) are in the sales business and if they consider you a suitable candidate, they’re going to use any tactic to push you into a decision. If you allow yourself to be easily swayed, you could end up regretting your decision. Make sure you do enough research, compare several lenders, and find out what their interest rates, hidden fees, and timescales are. These things are very crucial factors that need to be considered.

There are banks that charge as much as 80% and borrowers don’t even realize it. That’s because they only calculate the APR as the total fees divided by the principal amount (the amount they borrowed) instead of computing the interest based on the outstanding amount at every period in time (which is the amortized amount).

Finally, you must also find out how long it will take for the bank to review your application and fund the loan. Most banks take 2 weeks just to assess your application and then take 60 more days to release the funds. Time costs money and in business, time lost is opportunity lost.

  1. Failure to negotiate

One thing you need to know about working capital business loans is that it’s never a take it or leave it proposition. You can negotiate for a reduced interest rate, better payment terms, and other perks/benefits. You can even haggle for a better deal even if you have bad credit. The secret is to do your research and familiarize yourself with the financing market trends so you can leverage your knowledge to come up with a win-win agreement.

The Ins and Outs of Loans Receivables

If you plan on running a business of your own (or if you’re currently running a small business), then one of the first business administration tasks you need to learn is on how to come up with an accurate balance sheet. Essentially, a balance sheet shows your assets such as your cash reserves, your accounts receivables, your loans receivables, your equipment, and your inventory. It also shows your liabilities, such as your debts and your projected expenses.

So how do loans receivables enter into the picture? The loans receivable is the sum of money you have sent out as a loan that you haven’t collected yet. So if you’re running a bank or a lending institution, this sum is the money you lent out which you expect to get back. And if you’re earning interest on that sum, that interest goes into the balance sheet as part of the owner’s equity.

Here are some facts you may find interesting:

  • Loans receivable are related to accounts receivable, because you usually give your customers time to settle their accounts. So if you give them 30 or 90 days to pay instead of making them pay up front, it’s as if you lent them the money for 30 or 90 days.
  • It’s not only banks and lending institutions which can offer loans to customers. For example, some equipment manufacturers may offer payment terms to their customers which allow the customers to make regular monthly payments for 6 months or a year. This may also be considered a loan receivable.
  • Long term loans receivables may be difficult to use as collateral for financing. The reason why factors prefer accounts receivables is that they typically need only 30 days before payment is due. It’s very rare to give 60 day or 90 day payments, unless it is an industry such as health care where even 120 days to pay is not unheard of. But factors may not tolerate waiting for an entire year before the receivables are settled.
  • Your balance sheet should also reflect what you think is the most probable outcome regarding the payment of the loan. So if you think that $10,000 of a $30,000 loan receivable will not be repaid by the customer, then your balance sheet should reflect this by reducing the account by $10,000.

This is different for tax accounting, however. In tax accounting, the Internal Revenue Service would rather you wait for definite proof that the amount will go unpaid before you report it as a bad debt.

So why should you learn about loans receivables and balance sheets? If you’re running a business, the balance sheet gives you an accurate idea as to how profitable your company is and how valuable it is now. This can be very important when you are applying for a bank loan, because your balance sheet is one of the documents they will look at closely.

The balance sheet will also be important if you’re selling equity in your company to get additional financing. So if you’re planning to sell 10% of your company to get the capital you need, then you need the balance sheet to know how much your company is really worth as a whole.

How to Use Factoring to Get More Business

A lot has changed in the business landscape in the last 10 years, and analysists have reported that invoice factoring and cash advance sectors are increasing in popularity and momentum, growing at a double-digit rate each year. The market for factoring, wherein businesses take out a cash advance against their invoices, is even greater with Morgan Stanley stating the industry makes as much as $15B per year.

Why Factoring for Small Business is a Practical Option

With such a significant rise in popularity, one would have to wonder what makes cash advance services very attractive to small business owners. The reason for this phenomenon is not actually hard to comprehend. First of all, factoring is so much easier to obtain compared to bank loans. Banks usually check the length of history of the business, the amount of collateral needed and the payment terms of the loan, and many small businesses have not been around long enough to meet their criteria.

In addition, most traditional sources can only help borrowers who want to apply for long term loans (ie. 5 to 10 years). If you need credit and want to pay it off within 3 months to 3 years, banks usually won’t be able to help you.

How Factoring Works

There are many factoring companies online right now and they follow the same basic principle. If a business is having difficulty meeting cash flow, they can turn to a factoring service to get a cash advance so that they can continue their daily operations and even fund their expansion.

Factoring companies are very useful when it comes to short term cash advances and they provide “loans” of as much as 90% of the amount in the invoice. These alternative lenders, in turn, charge a “fee” for the service, usually a percentage of the invoice in addition to collection and management fees, if applicable.

When to Turn to Factoring

One important thing about factoring that a business needs to understand is that it’s not cheap at all but it’s also no more expensive than taking out a credit card cash advance. In fact, it’s probably cheaper and it also gives you the added benefit of not having to collect payments from your clients. Some factors even save you the hassle of doing credit checks on your clients because they can do it for you as part of their service.

But to ensure that you choose a trustworthy and honest factoring service, you have to take some precautionary measures.

  1. Choose a factoring service that really understands your business. Do business with one that has a high level of understanding of how your business works and the processes you employ so you can stand to benefit most from the partnership.
  2. Pick a funding partner with a consistent and guaranteed source of capital.
  3. Examine the terms of the transaction. Check the interest rate and fees and compare the numbers with what other funding providers are offering.
  4. Get a copy of the contract and read it in advance (before signing on the dotted line).
  5. Scrutinize the management team, find out how long the company has been around, and ask for customer references.

Factoring as a financing option for a startup business has proven to be very useful not only to keep the company afloat but also to help them grow. With a steady cash flow, there’s nothing that will stop you from increasing your revenue and taking advantage of every opportunity you can get to make more money.

What are Asset Based Lending Companies?

In a perfect world, as a small business owner you can borrow money without collateral and lenders will just take you at your word. But then again, in a perfect world you probably wouldn’t even need additional financing. In the real world however, you may have to approach asset based lending companies to provide necessary funding for your business.

What Are Asset Based Loans?

Asset based loans are what you get when your business needs to boost your working capital because you’re having cash flow difficulties. Often this is not a case of poor market conditions, but actually a consequence of rapid growth.

For example, you’ve received a lot of purchase orders which offer a lot of profit opportunities for your business. But each purchase order requires a sizable investment because your suppliers are demanding payment upfront.

Or you can be a manufacturing firm and the demand for your products has suddenly tripled, so you open another manufacturing plant which again costs a substantial amount of money.

If your small or midsized business is trying to expand, but it is basically stable and have financeable assets, then this growth can be accommodated properly. Some lenders don’t even mind if your business doesn’t have a very high credit rating or a long track record.

Which Types of Assets Are Eligible?

The most typical assets accepted by asset based lending companies are accounts receivables. But other assets may also be accepted. These assets include the expensive equipment you use, the real estate the business holds, and the inventory of products.

What’s important here is that these assets must not be involved in any tax, legal, or accounting issue. If they are to be used to secure the loan, then they should not be already pledged as collateral to another lender, unless that lender agrees to subordinate its position. In other words, if your business is unable to pay off the loan, then the asset based lending company gets first dibs on your assets to pay off the loan.

The asset based lending companies inspect the assets and then offer a percentage of the value of the assets. Usually, with accounts receivables you may be able to borrow as much as 80% of the value of the ARs. For equipment and inventory, the money you can borrow is usually no more than 50% of the value.

Lenders may usually inspect the assets regularly especially when they involve equipment or inventory, and these inspections will be part of their fees.

Difference between Asset Based Lending Companies and Factors

When you deal with asset based lending companies, you are essentially borrowing money. While this may seem similar to factoring when you use ARs, with factoring you’re not borrowing money at all. Instead you’re selling your ARs.

Also, in factoring the factor is involved in the collection process. In fact, your customers pay the factor directly and they forward your money to you after they have deducted their fees. While many lenders now also prefer this approach, other asset based lenders may not have any contact with your customers.

The Increasing Popularity of Business To Business Finance

Just about every small business owner knows the value of having enough cash on hand to cover operational expenses and various emergencies. Banks aren’t exactly as helpful as they once were, however, so getting a bank loan or a line of credit can be excruciatingly difficult.

It doesn’t matter if your company is already profitable and established. The bank will still require a paperwork from you which will take many days to prepare. And the approval decision can drag on for many weeks and sometimes even months. And you may yet end up not getting the financing you need.

This is the current scenario which is fueling the rising popularity of business to business finance. Here are some facts you need to consider.

  • The B2B lenders are very easy to find, as you can just go online. Some online companies lend the money themselves, while others have access to as many as 300 lenders which can offer you terms for the loan once you put in your applications. This is a significant improvement over going to banks and negotiating for loans in person.
  • Each B2B lender has its own way of doing things. Some lenders offer cash advances against outstanding invoices. Others offer short term loans, and some are peer to peer lenders. Even payment processors such as PayPal are getting into the act by offering loans to some of its merchants.
  • Here’s an example of how an online lender uses your invoices to give you the money you need. You sign up to the lender’s website, and you allow the lender access to your bank account and accounting software such as QuickBooks Online. You pick an unpaid invoice worth $5,000 and you get the line of credit right away.

Then over the course of 12 weeks, the lender collects its repayments in weekly installments that are automatically debited from your bank account. While the fee may depend on the riskiness of the loan, but in general it may range from $243 to $343 when a $5,000 invoice is involved.

This translates to an APR of 38 to 54 percent, but at least the pricing of the fees is transparent. There are no hidden “processing” fees to pay as well.

  • Another example is to get the help of a consultant, which may not even charge you anything in fees when you apply for a loan. You simply indicate your particulars such as your name and employment and the amount you need. You’re then given a list of lenders with their loan offers. You pick the one you want, and then your loan is sent to your bank account. The money is then repaid through regular deductions from your bank account.

The popularity of this type of financing is increasing. One invoice based lender is now lending up to $200 million a year. Another short-term lender is now funding $3 million a day in loans. Because the loans are easy to get, it’s inevitable that this form of financing will become even more popular in the coming years.

Why You Need AR Factoring Companies for Your Particular Industry

Factoring is a financing method where the finance company called the factor offers a substantial cash advance (usually 80%) of the value of the accounts receivable. The problem is that some business owners choose an accounts receivable factoring company based solely on the fees they charge. But what’s really more important is that the AR factoring companies you should consider should also specialize in your particular industry.

Medical Factoring

One good example here is medical factoring. Factors who do not have experience in the medical industry may insist on letting customers to pay in 30 days. But that’s not going to happen in the health care industry where the “customers” are mostly Medicaid, Medicare, and private insurance companies. These organizations usually take as many as 90 days to pay up completely, and some insurance companies tend to contest medical bills whenever possible.

This is hard to explain to inexperienced factors, but to those with experience this is a fact of life that’s accounted for in their factoring service.

Construction Factoring

In the construction industry, another set of rules exist for factoring. In fact, different types of construction projects may have different requirements. For example, financing a directional boring contractor is very different from funding a cell tower maintenance provider even though both belong to the construction industry.

The industry also involves progress payments, which may not be very precise. When a portion of a construction project is completed, then a specified part of the payment is made. This is different from wholesale companies which need to deliver an entire order before a payment is made.

Construction factoring may also involve general contractors and subcontractors, and this is another wrinkle that inexperienced AR factoring companies may find confusing. Sometimes, a subcontractor only gets paid when the general contractor is paid. This is called the “pay when paid” clause, and only an experienced factoring company will know how to deal with this issue properly.

Factoring in the Trucking Industry

Many factors offer credit investigation reports to their clients, and for trucking companies that’s a very useful service. After all, factors set their approval and their rates based on the creditworthiness of your customers. Their findings should be made available to you by your factor, so you know to whom you can extend credit in the first place.

But factors who specialize in trucking should also offer a fuel card program. This offers substantial discounts for your trucking firm. They should also offer fuel advances too, which is a special type of advance on accounts receivables to cover fuel expenses.

When opting for factoring to fund your business, your choice of AR factoring companies mustn’t be based only on how low they charge. It must also depend on the breadth of experience the factoring company has in the industry your involved in. When you deal with an experienced factor, you no longer have to explain things. Instead, the factor may even have ready solutions for your problems.

Business Loans Offered by the Government

You need to have enough capital before you can start a business and it’s never wise to touch your life savings or even the money you have set aside for the rainy days. This is so that no matter what happens to your business, your personal life would not be in jeopardy.

Business loans from the government are among the available options for people looking for capital. Many startup businesses consider these kinds of loans more suitable for them because traditional lenders such as banks are often reluctant to grant loans to those without any financial history or a stellar credit report. Although one of the requirements of business loans the government is offering is a good credit report, they are not as stringent as the private sector and they also offer better interest rates and terms.

Who Grants Government Business Loans?

There is a government body known as the Small Business Administration (SBA) and they are the ones who partner with banks and credit unions, backing up loans to lower the lender’s risk and thereby boosting the business owner or entrepreneur’s credibility. If the borrower defaults on the loan, then the SBA will pay off the balance. No risk to the bank.

You can apply for a business loan for the following purposes:

  • Establishing a line of credit
  • Refinancing current debts
  • Purchasing new machinery, equipment, supplies, and others
  • Financing leasehold improvements
  • Financing commercial mortgage

Types of SBA Government Loans

The Small Business Administration has several lending programs and some of its most popular types of loans include:

  1. 504 Fixed Asset Program

This type of government business loan features long term financing and fixed rates. It is more suited for businesses that will directly benefit the community by offering much needed services or by providing more jobs. The maximum loan amount is $5 million.

  1. 7(a) Loan Guarantee Program

This loan is geared towards helping small businesses get started or grow. The maximum amount you can loan under this program is $5 million.

  1. Disaster Assistance Loan Program

This program aims to provide renters or homeowners with a long term, low interest loan to help them restore their property after being struck by a disaster.

  1. MicroLoan Program

This is generally a short term loan and is often used to purchase supplies, equipment, furniture and so on. The maximum loan amount is $50,000.

 

Preparing Your Loan Application

 

Each program under the SBA has its own application process and set of eligibility criteria. Generally speaking however, you need to have a decent credit report and should have invested a reasonable amount of money into your business. You should also have a sound business plan, and you’ll need to submit your income tax returns for the last 3 years. Some legal documents such as your articles of incorporation, license and contracts will also be required.

 

Business loans from the government are without a doubt very helpful because they give you excellent terms and low interest rates. But they are not for everyone. If you don’t meet any of the requirements above, or if you need a loan fast, then you have to consider other non-traditional options such as invoice factoring. Invoice factoring is not technically a loan, but a cash advance against your invoices. The interest rates are higher than regular business loans but they are easier to attain and also have quicker approval times.

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 to Spot the Best Factoring Company for Your Business?

Many businesses these days have already recognized the many benefits of factoring and other forms of alternative financing. This funding method involves having a factoring company advance about 80 percent of the value of your accounts receivable instead of having you wait for 30 or more days for the customer to pay you in full. The money you receive can immediately be used for operational expenses such as payroll, overhead, and supplier fees. But it all hinges on whether you get the best factoring company for your business.

There are several ways to determine whether a factoring company is better than another. All things being equal, the factoring company that offers the lowest service fees is obviously better than another lender that charges higher fees. But not every company offers the same kind of service.

The Factor Should Understand Your Industry

This is one of the more crucial considerations you need to remember, but unfortunately a lot of factoring clients don’t realize its importance. First of all, you need a factoring company with experience, because you don’t want a factoring company that’s still feeling its way around.

This experience should also be in your industry, because the factoring needs of a trucking company is very different from the needs of a medical clinic. A trucking company may enjoy perks such as fuel advances, while a medical clinic needs a factor who knows the ins and outs of collecting from health insurance providers.

When you have an experienced factor, you may even enjoy benefits that you never expected. To check whether your factor has experience in the type of factoring you need, you should ask the factor for references in your industry.

You Can Get a Customized Service Package

The service of a factor goes beyond offering a large advance percentage for little costs. But the service package is not just about the fees. The terms must also suit your needs. For example, getting a 90% advance on your invoices may seem better, but it may not matter when 80% of the invoice value is enough for your needs. The higher advance may come with higher fees.

Collecting the fees is also usually the responsibility of the factor, but in some cases your customer may want to pay you directly instead of paying a company they don’t know. Some factors realize this and can make the necessary adjustments to their procedures.

Other businesses simply do not want to deal with invoices altogether, so some factors take care of each invoice instead. This can save a business from having to setup a separate department to oversee this particular function. This saves you money too.

They Have the Financial Resources You Need

Simply put, your factoring company should be able to handle the invoices you submit for factoring. For example, they may be able to handle invoices averaging $50,000 and totaling $500,000 a month right now. But if your company grows and your business begins to earn millions of dollars a month, then the best factoring company should still be able to accommodate your “growing” needs.

 

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.