No Nonsense Guide to Applying for Credit for Small Businesses

    • One of the most important criteria for launching or running a small business is having the funds to support your projects. Entrepreneurs with great ideas often have a hard time getting things off the ground because of a lack of finances. Luckily, we live in a day and age where there are several ways to garner the capital required to operate a small business.

      If you run a small business and could use extra funding, you just might be in luck. With so many options of funding available, it is more a matter of finding one that suits your needs best. Each type of credit comes with its own set of conditions, and by understanding each one better, you can make an informed decision.

       

    • The Different Types of Credit Options for Small Businesses

      Let’s take a closer look at the different credit options that are available and learn about each in more detail.

      Bootstrapping and Personal Options

      Bootstrapping is usually one of the first financing options a small business owner thinks about. Bootstrapping is the process of consolidating personal assets to fund the business. An owner might sell assets, use their savings or their personal credit cards to pump money into the business to get through a rough patch or start a new project.

      The big advantage of this type of funding is that the business owner is not indebted to anyone or any financial institution, nor do they have to part with any equity. However, there is a high personal risk involved. If the business does not bring in sufficient Return On Investment (ROI), then the owner faces losing all of the money they invested. On the other hand, all profits belong solely to them.

      The second choice of funding usually is to ask family or friends. Close family and friends can sometimes offer interest-free loans with no fixed payback time. This kind of generosity takes a lot of the stress off a business owner. However, when personal relationships get involved in business, there is always the risk of bad blood developing. Being unable to pay back a family member or friend can have unfortunate consequences. These types of arrangements are best saved for when there is absolute certainty of being able to pay someone back or if the funds are given as a gift.

      Bank Loans

      The next option is a more formal method of obtaining funding and involves applying for a bank loan. The way a bank loan works is that you put in your application with all the required documents, and if you meet the criteria, you are sanctioned a loan. The loan amount might be what you had asked for or might be lower depending on what the bank decides you are capable of paying back.

      Along with paying back the borrowed amount, there is also an interest that has to be paid back. The percentage of the interest will be determined by the bank and has to do with your credit score, business revenue, whether you put up collateral. Usually, a better credit score and collateral help to bring down the interest rate.

      Applying for a bank loan as a small business can be a lengthy process. Loans for small businesses can range from $5,000 to $250,000, and sometimes more. Some of the criteria that are looked at when sanctioning a loan include:

      • The location of the business
      • The size of the business
      • Owned assets like real estate and equipment
      • Profit margins
      • The reason for the loan, like launching a new product, buying new equipment, and expanding the business
      • The length of business operation
      • The credit profile of the business, loan history if any, and any other financially related aspects

      In addition to all the paperwork involved in applying for a loan, there is also the uncertainty of whether the loan will be sanctioned. If it is sanctioned, there are other costs like bank fees involved which should be accounted for when applying for the loan.

      A bank loan is a good option to finance your small business if you can meet all the required criteria and will be able to pay back the loan amount and interest within the specified period of time.

      Online Loans

      Many credit lending companies are now offering online loans. As the name states, you apply for an online loan by visiting the company’s website and filling up the online form. You will be required to answer the questions that are in the form.

      Advantages of applying for an online loan include:

      • Applications accepted 24-hours a day, seven days a week
      • Usually, no paperwork involved
      • The application process is much faster
      • No automatic roll-overs and renewal fees

      However, there are disadvantages to applying for online loans as well, and these include:

      • The amount that can be borrowed is much lower than a bank loan, and usually never goes above $5,000.
      • While the loan might appear interest-free, you do pay back an amount that is greater than the borrowed amount.
      • Failure to pay back an instalment on time attracts late fees, dishonour fees and could affect your credit score.

      The best time to apply for an online loan is when you are looking for a small amount of money which you can pay back in easy instalments. Online loans are also a good option if you don’t meet the required criteria to apply for a bank loan.

      Business Line of Credit

      When you can’t get a bank loan, and an online loan just won’t cut it, your best option would be a Line of Credit. A Business Line of Credit is a flexible and convenient way to fund a small business while maintaining control over your funds. Like a bank loan, credit lines also involves paperwork and you furnishing your financial details, but there is one significant difference.

      Unlike a bank loan where you are given the full amount at one time and expected to pay it back within a fixed period, a Business Line of Credit gives you access to a pool of funds. How this works is that when you are granted credit, you have a number of funds that you can borrow from as and when you need. The amount is pre-fixed, for example, at $10,000, and you can keep borrowing funds within that amount.

      The main difference, however, is that you only need to pay back what you have borrowed and the interest on that amount. So, if you withdraw $2,000, then you only have to pay back the $2,000 and the interest within the time frame. If you pay the amount back before the term expires, you can once again access the full amount of $10,000.

      There are several advantages to applying for a Business Line of Credit, which include:

      • A Line of Credit allows you flexibility and control over the funds. You have the options of using only as much as you need when you need it.
      • This type of funding gives you the extra cash you might need when buying materials to complete a big order. Once you have been paid for the order, you can pay back the credit while having made a profit.
      • With a Line of Credit, a small business has the extra funds to tide them over when funds are low. The business can keep running, products can continue to be made, and salaries can be paid because of the extra funds at hand.
      • You have the opportunity to invest in something like new equipment or hire a new employee.
      • When applying for a Line of Credit, you don’t have to have a great credit score or a long credit history.
      • Paying back what you borrow from a Line of Credit on time helps to boost your business credit. With a better business credit, you can even consider applying for a loan in the future if you need a larger amount of money.

      A Business Line of Credit comes with many benefits, but it is always better to understand the whole picture before choosing any type of funding.

      • There are several companies offering Line of Credit to small businesses. All these companies come with their own fee and interest rate structure and sometimes even hidden costs. It is important to research a company carefully before applying for a business line of credit with them.
      • Most companies will require you to be in business for at least two years before you qualify for a Business Line of Credit.
      • There is a good deal of paperwork and document submission involved in applying for a Line of Credit for a business. Make sure you have all your documentation ready before you apply.
      • Typically, the amount that you can borrow is lower than what you can borrow on a bank loan.

      When weighing the pros and cons of a Line of Credit, it is a very good option if you have a well-established business, all your paperwork is in order, and you need a moderate amount of funds. The flexibility and convenience offered by choosing this type of funding are unmatched by any other formal lending service.

      Taking a Line of Credit is also a way of debt consolidation. With the funds from the Line of Credit, it is possible to pay off other debts that the business owner might have incurred in the past. If you are looking for a good loan alternative, then a Line of Credit is an option you should explore.

      Angel Investors & Venture Capitalists

      Angel investors are individuals who invest their own money in your business because they believe in what you do. What angel investors get in return is equity in your company; in other words, they own a percentage of your company and receive the profits accordingly. Being individuals, the amount that is invested can be high but has its limits.

      Venture capitalists are companies that raise funds from investors and then invest in your business if they find it to be a good source of revenue. The amount that can be brought in from venture capitalists is much higher than an angel investor and also possibly a bank loan. However, as in the case of angel investors, you will need to give up ownership of a percentage of the company to the investors.

      In both cases, you have to be very convincing about why your business needs the funds. Not only will your business plan be scrutinised but also your business credit history. Before you can approach angel investors or venture capitalists, you need to make sure that you have an airtight plan in place.

      If you’re trying to decide between an angel investor and venture capitalists, you need to examine how much funding you need and how much of your business are you willing to part with. A lot will also depend on what stage your business is in. Businesses that are just starting off have a better chance approaching an angel investor who believes in the products or services being launched. Venture capitalists have a higher risk because they are investing clients’ money; this is why they prefer more established businesses with a good track record.

      Crowdfunding

      The internet has made a new type of funding possible called crowdfunding. Usually, through a crowdfunding website, a business owner appeals for funds to anyone who would like to contribute. Included in the appeal is the description of what the funds are intended for, how much you need and by what date you need them. You don’t need to offer donors any equity in your company, but you can give them incentives. Incentives could include giving acknowledgements, offering discounts or products or maybe even a few freebies depending on what you can manage.

      The advantages of crowdfunding are:

      • It is a relatively low-risk way of getting funds
      • You donors are very likely to help market your product by word of mouth
      • You retain full ownership of your business

      The disadvantages of crowdfunding include:

      • There is a good chance that you won’t reach your target amount within the time limit specified.
      • Convincing people to fund your project could take considerable time and effort.
      • There is a lot of competition in the crowdfunding arena, so you really have to stand out to get noticed.

      Crowdfunding works best if you are not looking for a very large amount of fund, and if you want to test the idea of a new product with the public. Depending on the kind of support you get, you have a better idea or whether or not there is a viable market for what you are offering.

    • How to choose the right type of funding option

      With all the various options out there, it can get hard to decide which is the best funding option for your small business. However, by process of elimination, the options can be narrowed down to what works best. There are a few questions that you can ask yourself when trying to decide that will not only make the process simpler but also give you your best possible options.

      Here are the questions that you need to answer:

      How much money do I need?

      Asking the question is the easy part; it’s when it comes to working out a figure that most business owners get tripped up. Another mistake that business owners make is not trying to work out an estimated amount at all. Simply deciding on a round figure like $10,000 is not enough. Careful planning and budgeting are required at this stage.

      When you work out how much you will need, what happens is that you might realise that you don’t need a full $10,000, but $5,000 is enough. If you work out a smaller amount, you can consider different sources of funding. Or maybe you realise that $10,000 won’t be enough, and you need to consider higher paying options. In the second scenario, you will also need to check your credit score and business credit history.

      What do I need the funding for?

      This is an often-overlooked question. Many business owners know that they could use the extra money to grow their business but don’t have a clear idea what kind of growth they are looking at. The second question ties into the first one because it is only when you have a clear idea of what you need the funds for can you work out how much you will need.

      Chalking out a clear growth plan is very important when trying to decide what kind to funding option to choose. If you just need to pay off some debt, then a Line of Credit might suit you well. Alternatively, if you want to launch a new product which might have popular appeal, you could look for an angel investor, venture capitalist or even crowdfunding. Some projects suit one type of funding better than others.

      How soon do I need to get the funds?

      Timelines are very important when it comes to choosing your type of funding. Bank loans could take a long time to get sanctioned while an online loan is almost instant. Crowdfunding gives you the freedom to set your own timeline. However, you also need to remember that each of these options has different funding limits. While, if eligible, you could even get a bank loan of up to $250,000, an online loan never goes above $5,000.

      So, if you need a larger amount of funds in a short time, you could take a closer look at a Line of Credit. A Line of Credit is also a stopgap which gives you access to funds when you need them in a hurry and also improves your credit score. With a better credit score and the extra time afforded to you, you can always apply for a bank loan a little later if you need more money.

      Am I in a position to apply for a loan or should I look at other options?

      When you are clear about how much you need and how soon you need, the next question is- will you qualify for the type of funding you want? Bank loans and Line of Credit require some amount of paperwork while an angel investor will need a detailed business plan. If you meet all the criteria to qualify for a bank loan or Line of Credit, then you should go ahead and apply for those options.

      However, if, for whatever reason, you don’t qualify for a loan, you should look at all your other options. Again, you will need to consider how much you need and what you could do in the meantime to help keep the business running. Applying for smaller amounts from other sources till you can get all your paperwork in order could be helpful.

      Will I be able to pay it back?

      Another big part of the process of applying for funding is being able to pay it back. Aside from receiving a gift or crowdfunding, all other forms of formal money lending require you to pay the amount back and with interest. There are also fees and other costs involved that should be accounted for when you plan on applying for funding.

      You should be very sure about being able to pay the amount back because failing to do so comes with its own set of problems. Late fees, interest on the amount that is not paid back, and other penalties all quickly add up to an amount that is considerably much higher than what you initially borrowed. So, unless you want to face the collections department of a lending agency and pay a hefty compounded fee, you need first to make sure you will be able to pay back the loaned amount.

      How will my credit score get affected if I use this mode of funding?

      Every major business financial transaction affects your credit score either negatively or positively. How taking a loan or a Line of Credit will affect your credit score will depend on whether or not you make your payments on time. If all goes smoothly, then your credit score is positively affected. But if you default on the payments, then you risk negatively affecting your credit score.

      Another factor that comes into play is how many loans you have already taken. If you already have one or more existing loans that you are in the process of paying back, it will reflect on your credit report. For every additional kind of funding you apply for, your debt to income ratio will be calculated. Only if you are found capable of paying back yet another loan or Line of Credit, will you be sanctioned a new loan.

      Keep in mind factors like how it is easier to pay back a Line of Credit than a loan because for the former, you only pay back what you use. Crowdfunding might not affect your credit score much, but you might need a good credit score to be able to apply via a crowdfunding website. Before settling on a type of funding for your small business, it is always better to read all the fine print to understand exactly what you are getting into.

      Finally, you need to remember that every situation is different. What worked for you at one point of running your business might not work a second time around. In every situation, it might also be a good idea to get financial advice from a qualified consultant. Learning how to consolidate your finances will also help you immensely in the long run.

      Secured and unsecured loans and Line of Credit 

      Both loans and Line of Credit come in two main types – secured and unsecured. A secured loan or Line of Credit is when you offer some sort of collateral when applying for the loan. Collateral is something of value which could include property, a vehicle, equipment and so on. The advantages of secured funding are that the borrowing limit is higher, and the interest rates are lower. However, on the downside, the applicant risks losing their collateral if they fail to pay back the borrowed amount within the specified amount of time.

      Unsecured loans and Line of Credit’s do not require you to offer collateral, but because the risk is higher for the lender, the borrowing limit is lower, and interest rates are higher. Unsecured funding is easier to get if you have a high credit score and good business credit history. If you don’t have a good credit score however, you might have to consolidate your assets to offer viable collateral.

      Debt Vs. Equity

      Garnering funds for a small business can be divided into two main categories – debt and equity.

      Loans and Line of Credit’s qualify as debt funding because the business owner retains full ownership but has to repay the borrowed amount along with interest. Angel investors and venture capitalists are equity types of funding wherein the business owner gives up shares of the company to the investors.

      The advantages of debt funding are:

      • The business owner retains 100% ownership of the company.
      • Only the borrowed amount and the interest has to be paid back, the company’s profits have no bearings on the amount to be paid back.
      • The amount is usually paid back in fixed instalments which makes it easier to plan and budget for.
      • There is no need to constantly update investors on how the company is performing.

      The disadvantages of debt funding are:

      • Loans and business lines of credit have a fixed term by which time they need to be repaid. Investors that hold equity, on the other hand, receive the profits as and when the business is performing well.
      • The interest rate usually doesn’t fluctuate, which means that regardless of how well or badly a business is performing, the amount has to be paid back.
      • Paying back a loan or a business credit line requires steady cash flow.
      • Debt funding can restrict a business owner’s chances of applying for other sources of funding. Equity funding doesn’t usually affect business in this way.
      • Assets might have to be offered as collateral to have a loan sanctioned.
    • Applying for a Line of Credit with &Solved

      When considering all the factors involved, a Line of Credit appears to be the best option for companies that have already taken off the ground but are still in their early stages. These companies that don’t yet have an extensive business credit history and want to build their credit score can greatly benefit from a Line of Credit. &Solved offers Line of Credit to owners of small businesses in a simple and hassle-free process.

      How it works

      &Solved has a straightforward online application process that doesn’t take a lot of time to complete. The most important things for the business owner to have ready are their ID and income details. The application process is free, and there is also no establishment fee.

      Every applicant gets personalised attention. Interest rates are customised to suit individual financial profiles. Rates start from 14.99% p.a. with flexible repayment options. Every small business owner can find a rate that suits their budget.

      You only need to apply once, and when approved, credit is available immediately and remains ongoing at no cost. You only need to pay interest on what you borrow and not on the entire credit pool that is available to you. Credit line pools can range from $2,000 to $20,000 with no security required.

      &Solved offers clients a reliable source of funds with a stress-free mode of paying the borrowed amount and interest back. There are no hidden costs involved, making applying for a Line of Credit simple and convenient for small business owners all over Australia.

      Apply Now Contact Us