The best time to ask for money is when you don’t need it.

If you ask the bank for a loan when your business is struggling, they’ll find reasons to delay or deny your application.

But if you ask when your business is thriving and the P&L is strong, you’re likely to get approved with just a few questions.

“But why would I ask for money when things are good?”

The answer is simple.

You may not need it now, but you could in the future. And there’s no reason why a traditional SMB shouldn’t have some form of open working capital.

Even if you’re not going to use it, you can at least invest it in treasuries and leave it there.

Why am I so adamant about this?

Because I’ve said it before, and I’ll say it again.

Poor cash flow management is the most predictable way to kill your business.

And one of the worst things you can do is be caught in a tight spot with inadequate reserves.

So, this week, I’ll be talking all about the best times—and the best methods—to secure financing.

Let’s get into it.

When to Ask

Aside from not being in dire financial straits when you go to look for financing, there are a few more things to consider as an owner before reaching out to lenders.

First and foremost, you need to have a strategic plan in place.

Doing so not only increases your chances of success and makes the application process less stressful overall, but it also gives you a much more accurate picture of your needs going forward.

Does your business have a lot of seasonality to it? Are there any upcoming investments that will require a lot of cash upfront before you start to reap the benefits? Do you plan to pivot or introduce new offerings?

Are you planning on taking out a large loan in the future to fund a major project? If so, borrowing in smaller amounts now can help you build credit in preparation for that much more important application in the future.

Even if you already have the cash on hand to cover these planned outlays, estimating their amount and timing will give you a much better idea of what you might need to still keep the lights on in case of an emergency.

Strategic planning also gives you another opportunity to take an honest look at your financial standing. If you’re not in a strong position, you’ll know to put that loan on hold and redirect your energy toward turning things around.

It pays to wait until your business is ready because your current financial situation will directly impact the financing options available to you.

A couple of caveats before I move on though.

If you’ve been in business less than two years, you’re better off waiting if you can. Doing so gives you more time to show lenders that your business is stable.

Second, you’ll need to make sure that both your business and personal credit scores are strong. Many lenders require a personal guarantee, so attending to both sides of the house will greatly increase your options.

Finally, you should reconsider financing right now if making the payments would strap you for cash in other areas.

At the end of the day, lenders want to see that you have sufficient cash to repay them and a coherent plan for using the funds. Show them that the cash will be used to improve the business rather than just keep it on life support—even if you’re just securing the financing to beef up your reserves.

Getting the Funds

Financing Options

Before I get straight into the how of obtaining financing, I want to briefly mention a few of your options.

While this week’s post is focused on when and how to get a more traditional loan, these aren’t your only options to consider for a before-you-need-it cash infusion.

For example, you may prefer equity financing. I also recommend looking into any and all grants that might be available to you as a small business owner before borrowing anything. After all, the best kind of money is free money.

With that out of the way, onto your debt-based financing options.

Going through a traditional bank, you’ll be able to choose from term loans, getting a line of credit, and/or a business credit card.

Getting a loan is generally your best bet though for the purpose of building up your reserves before you need them. Business lines of credit and credit cards make more sense if you’re looking to cover actual gaps in cash flow.

Term loans typically come with low interest rates, but qualifying for them can be difficult. You’ll typically need good personal credit, stable revenue, and to have been in business for more than two years to be eligible.

SBA loans are generally easier to obtain than a non-SBA bank loan. They also can mean a lower interest rate since the federal guarantee on them makes approval less risky for banks. The most popular SBA loan type is the 7(a), and it’s good for amounts up to $5MM. But with all that said, you’ll still need to meet all the criteria for a bank loan in most cases. The application process is also a little more cumbersome.

How to Apply

Assuming you’ve already assessed your financial position and determined that it’s time to apply, you need to make sure that you meet the lender’s minimum for annual revenue. This typically ranges anywhere between $50,000 to $250,000.

SBA microloans are still an option at this stage if you’re under that threshold.

Next, check one more time that you’ll be able to comfortably make the payments. This time, you might want to get more concrete estimates of your financing costs by reaching out to a few lenders. Your goal in reaching out is only to get a ballpark estimate at this point rather than opening up any application processes.

In general, your income should be at least 1.25X your total expenses, including the proposed loan payment amount.

Then, you’ll need to make sure that the amount and timing of your loan payments match your existing inflows to avoid creating any liquidity issues.

Once you’ve done that, you’ll want to shop around. Don’t skip this step, as it will lead to getting much better terms.

In addition, you should compare other attributes like speed to ensure you go with the best lender and loan for your business.

Now that you’ve shortlisted lenders, it’s time to organize your application materials. Note that you’ll typically need a little more than what I’ve listed below if you’re applying for an SBA loan.

Each lender will differ slightly in exactly what they require, but you’ll generally need the following to get approved:

1. General business information

   This generally includes the business name, EIN and address. Some lenders may also ask for a business plan here.

2. Business and personal financial statements

   Your P&L, tax returns, and bank statements for the business and owners are generally what’s needed here.

3. Owner information

   This includes your name, address and social security number—as well as these details for anyone who also owns a material portion of the business.

4. Collateral information

   If you need to put up collateral, here is where you’ll specify the type of collateral and what it’s worth. You might want to get these valued independently before submitting your application.

5. Personal guarantee

   This states that you will be responsible for paying back the loan with personal assets should the business fail. Your partners, if applicable, will likely need to sign one as well.

Once your documentation is ready, the approval process will differ slightly depending on the lender. Some banks let you do this over the phone while others require an in-person appointment.

But before you do this, consider having a professional look it over. Your local Small Business Development Center (SBDC) can also help with this.

Making sure everything is provided in the correct format will reduce unnecessary back and forth with the lender. In turn, you’ll get a quicker decision.

Once the decision is back in your hands, the last step is to review the loan agreement. It will lay out all the terms, schedule of repayment, applicable fees, and just about any other detail you might need to reference later about the loan.

If anything in that document is less than crystal clear, reach out to the lender for clarification. I recommend having a small business attorney review the agreement as well.

Once everything looks good, you’ll return the agreement to the lender and get your funds—typically by having them deposited directly into your business account.

There you have it. The when and how of obtaining financing.

If you’re looking for a loan and need some help getting started, feel free to reach out. As always, I’m happy to help.

All you need to do is reply to this email or shoot me a DM to get connected.

Putting It All Together

Here are your top takeaways from this week’s post.

1. The best time to ask for money is well before you need it.

2. While lines of credit and business credit cards can help you address gaps in cash flow, a small business loan is typically your best option for getting the funds for before you need them.

3. But don’t neglect to research which grants you may be eligible for. Free money beats cheap money any day.

4. Traditional small business loans generally offer low interest rates, but the application process can be lengthy. It pays to be prepared and in good financial standing before reaching out to lenders or shopping around for rates.

5. SBA loans are usually easier to obtain, but the application process is more cumbersome. 7a loans can be used for a variety of purposes for up to $5MM, but they are far from your only SBA option.

6. Before you apply for a loan, you need to have a solid strategic plan in place and confirm that your business is in the right position to be obtaining financing.

7. You might also want to hold off on getting a loan if you’ve been in business for less than two years.

8. If your annual revenue is below $50,000, but you still wish to obtain financing, SBA microloans are a solid option.

9. Before taking on any additional debt, make sure that your revenue is at least 1.25X your expenses—including the future loan repayment amount.

10. Take the time to shop around for lenders. Skipping this step could cost you thousands.

11. When gathering up your application documents, you’ll usually need some variation of the following for you, the business, and any other part owners: personal information, business details, financial statements, collateral info, and personal guarantees.

12. Working with a professional to review your application can get you a faster decision by making sure everything’s correct on the front end.

13. Before signing anything, review loan agreements in detail and clarify anything you need to with the lender. Working with a small business attorney is highly recommended here as well.

Hungry for More?

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2. Shoot me an email with your questions or requests for what you’d like me to write about next.

‘Til Next Time,

Connor