Virtually every company needs to borrow at one point or another – and most small businesses sometimes require a short term business loan to deal with a cash flow crisis or fund expansion. So what should you bear in mind before setting out to find finance?
1 Understand how much you need short term
Borrow less than you require and you won’t solve your problem. However, if you overestimate what you need, you will be paying unnecessary interest, which in turn will further compromise your cash flow.
2 Do a bit of background research
There are plenty of financial products out there, so don’t immediately assume that you need a conventional loan. For instance, if you’re dealing with recurring cash flow problems, then invoice factoring or discounting could put paid to them once and for all.
These innovative solutions allow you to borrow against your invoices, the instant you issue them, with repayment being made when your customers pay you. With factoring, the finance company takes control of your debtor ledger and assigns experienced credit control professionals to secure early payment, whilst with invoice discounting you deal with your own customers.
3 Talk to your bank
Banks aren’t the be-all and end-all of business finance, and they have significantly tightened up their lending criteria since the financial crash of 2008. However, if you have an ongoing relationship with a bank it makes sense to make it your first port of call for short term finance.
4 Talk to alternative lenders
That said, you should also talk to alternative lenders, so you can compare different solutions – and costs.
Alternative lenders will often lend when banks won’t, and they can offer a very different portfolio of products, including emergency business loans (which can deliver cash in under 24 hours), asset-based finance (where you borrow against the value of your premises, plant or equipment – ideal if you have a mediocre credit score) and of course invoice factoring and discounting.
5 Know your credit score
Talking of your credit score, you should make sure you know what it is, as this will significantly affect the options on the table. If you have a weak score, then banks are unlikely to lend and you should not waste too much time talking to them.
It’s also important to note that if you have a weak score, there are things you can do to improve it – in the short term, you should aim to pay down your credit card debts (whilst keeping the accounts open) and longer term should make certain that you adhere to the payment plan on any financial product.
6 Compare business loan costs carefully
Once you have a few offers on the table, compare the costs carefully. If possible, you should ask all lenders to quote an APR (which is actually a legal requirement for banks).
Otherwise you may need to compare different charging methods, such as APR versus factor rate (a factor rate of 1.2 would mean that if you borrow £50,000, you repay £60,000 in total).
7 Be ready to prepare paperwork
Bear in mind that banks tend to be pretty exacting about paperwork – chances are you will need to provide a business plan, articles of association, balance sheet, up to three years’ profit and loss statements and up to three years’ tax returns.
Alternative lenders generally don’t need to see all these documents, saving you considerable time – and in business, time is money.
8 Remember to talk to Cashsolv
Cashsolv are the short term business loan specialists, and we offer an innovative portfolio of products with fast approval. To discover what we can do to help your business get ahead, please visit our business finance page.