Opinion: The Four Key Steps to Getting Small Business Financing

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Photo courtesy Small Business Administration

By Jim Salmon

As more small businesses take off around the country, we’re seeing an increasing number of owners seeking business loans or lines of credit. This can be great news for local economies, entrepreneurs and small business aficionados, but only if small business owners know what they need and where to start.

Finding the right financing can be a problem for small business owners if they don’t know where to start. To improve the understanding around business loans and lines of credit, Navy Federal has identified four simple steps for successful financing, so anyone can pursue their small business dreams.

Step 1 — Get Your Finances in Order

The first step is to compile all the necessary financial documents. This will likely include your business plan, income tax returns, financial statements and legal documents, such as a business license, registration and any copies of financial commitments your business might have. Once collected, these materials will provide your financial institution (the one you hope will give you a loan!) with a road map of your past success and future plans. Out of all these materials, one of the most important is your business plan as it showcases your strategy for generating income. A financial institution is more likely to give you the financing you need if you can prove your ability to pay it back.

Step 2 — Decide on The Type of Financing You Need

This is the step where most small business owners get tripped up as there are two main types of financing available: business loans and lines of credit. Business loans are one-time funds that typically go toward large-scale capital investments, like office space or equipment, whereas lines of credit are best for short-term money needs.

Jim Salmon

Business loans are best used as longer-term loans, which can range anywhere from two to six years. Loans are typically secured ahead of time, with a specific use in mind. This type of financing comes with consistent, regular payments and a fixed rate — something any small business owner can appreciate.

Business lines of credit behave similar to credit cards. There is a set limit that you can continuously dip into and pay off. The downfall with a line of credit is that you may be required to keep track of your financial situation more regularly and report back to your financial institution to maintain access to the line.  Some financial institutions require a 30 consecutive day resting period with the line, meaning you may have to pay it down to $0 and keep it there for 30 straight days before accessing it again. Failure to do so could lead to your line being called due and loss of future draws.

If you’re looking for a fixed rate, with monthly payments and long-term use, Navy Federal recommends a business loan. However, if you find yourself needing quick access to cash, a business line of credit may be a better fit. It’s important to understand your financial needs and the support you will need from your financial institution.

Step 3 — Remember The 5 C’s

The five C’s are factors that go into determining if you’ll qualify for a business loan or line of credit:

  • Character: Financial institutions will look at you as an individual, including your personal history with borrowing and your credit history.
  • Capital: Financial institutions will also look into your assets, savings, equity, etc.
  • Capacity: There will be a comprehensive assessment regarding your past, present and future ability to repay the loan.
  • Collateral: Properties and additional assets will be looked into alongside capital.
  • Conditions: Be sure to ask yourself if you are trying to finance something that makes sense for your business in its current state. Any number of things can go wrong, whether it is in part due to the environment or the economy. Lenders certainly don’t want to invest their money without exploring every possible outcome, so ensure you are armed with tactical reasoning as to “why this business” and “why right now.”

By understanding these five factors, you will have a stronger comprehension as to what your financial institution looks into ahead of approving you for a loan.

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Step 4 – Find a Lender

After you’ve gathered all the necessary documents, your final step is to choose a financial institution. In many cases, it’s best to go with an institution where you are already doing your personal banking. For example, at Navy Federal Credit Union, we look at our applicants’ entire pictures, including their payment histories, available funds, open accounts and outstanding credit, rather than just their credit scores. A financial institution familiar with you and your financial history is more likely to give you a loan for a reasonable interest rate, versus a bank that doesn’t know your full borrowing history.

These four steps will help you — and your business — properly finance, grow and succeed over time. Along with each of these tips, always remember that patience and hard work are vital for a small business to thrive.

Jim Salmon is Vice President of Business Services for Navy Federal, the world’s largest credit union. The institution has 24 branches in the San Diego region.

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