*As published in SmallBizDaily.com.
“It takes money to make money,” is an old saying used when referencing investments and ways to grow a business. Advancing a company requires substantial investments — in equipment, people, infrastructure, and operations — and thoughtful, calculated decisions are absolutely necessary when that type of growth requires outside financing.
In terms of how to get financing for a small business specifically, there are a few critical steps to ensure the small business loan process is approached in the most successful way possible.
Step 1: Do your research on getting financing for a small business specifically in your industry
Every industry is vastly different when it comes to business needs and customer demands. Luckily, many types of financing are available, but it’s important to do the legwork to determine which type is right for a specific situation.
Because every business operates differently and comes with a distinct set of financing needs, research is the most important weapon in securing the right types of loans required to upgrade and expand business operations. Begin by first researching the associations within your industry. These professional organizations are there to support businesses by sharing industry trends, addressing relevant issues, and supplying valuable information, including about the small business loan process in your industry. They can also illuminate how to get financing to start a small business in the industry. Many of these organizations support and can recommend market-specific service providers, which can typically be found on their websites.
Once associations have been identified, it’s important to stay up-to-date with the relevant industry publications. Trade publications provide vertical-specific information that can support small business financing needs, questions, or concerns. Some sources can be biased, or even factually inaccurate, so it’s important to take any research a step further by asking for referrals and obtaining references.
Bolster any research efforts by attending trade shows that cater to your industry. Participating in these events provides ample opportunity to connect with like-minded individuals and organizations that have similar experiences, questions, and concerns as yourself, presenting an opportunity for direct knowledge sharing. There’s no better way to help de-risk a critical business decision than by learning pros and cons from a fellow small business owner.
Step 2: Think through the reasoning behind your need for capital
Before choosing the right loan product for your small business, consider the reason you’re seeking the loan in the first place: Do you need to get financing to start a small business? Are you growing your business? Are you using it for a project? Are you investing? Once an objective is determined, you’ll have an easier time choosing the right small business loan for your particular needs.
Whether you’re a restaurant owner wanting to build an outdoor dining area or a shop owner looking to buy new inventory, the next consideration in this process is your cash flow. Most small business lenders prioritize cash flow over the strength of the balance sheet, as by their general nature, small businesses will have very limited balance sheets. Specifically, you want to review your cash flow and how this loan will affect it. Properly anticipating the decrease, maintenance, or increase of your cash flow and in what time frame that change is set to occur is imperative, as lenders use cash flow to determine whether a business will be able to meet monthly loan payments.
Also consider the financial impact of a loan from a tax perspective, as several tax implications come into play when borrowing money. A tax advisor can share the ramifications for various small business loans and, ultimately, guide your decision.
Lastly, look at the time horizon: Are you seeking a loan for a short-term project, long-term investment, or recurring expense? Loan options are different depending on this time horizon. For example, if this is a short-term loan for a recurring project, it would be diligent to ask how renewing your loan works and what costs are involved.
Step 3: Find flexible financing solutions that enable your business to quickly and easily get the capital needed for continued growth and success
Small business owners typically aim to borrow small amounts of money, as the practice is convenient and offers a quick turnaround. There are three general options small business owners typically consider during the small business loan process:
Banks: When money is needed, borrowers typically look to their banks first. As bank robber Willie Sutton said when asked why he robbed the bank: “I rob banks because that’s where the money is.” All kidding aside, the choice seems intuitive because most individuals have well-established relationships with their banks. Your bank may even offer a low rate if you are considering taking the plunge. But the truth is, banks aren’t always as flexible with options as they appear to be. More than that, they often have more restrictions, higher collateral requirements, and slower small business loan processes.
Finance Brokers: Finance brokers offer a broader and customizable solution for many borrowers. Although this route is typically a better option than working with a bank, limitations often come with this route, too.
Finance Companies: The third and best financing option for small business growth and success is working with a finance company that is a direct lender. This option is typically quick and convenient for getting financing for a small business. Additionally, this option lets the borrower build an ongoing relationship with the lender, facilitating future transactions. Moreover, a finance company with keen knowledge of your industry can be a great business partner who can really help support your growth.
Getting financing for your small business may be a daunting prospect at first, especially if you don’t know where to begin. By consulting the steps above, you align yourself with the business and industry resources that pave the way to your company’s financial success and continued growth.
Mark Scardigli, Chief Sales Officer at Marlin, is a sales and strategic planning executive with over 25 years of experience in organizational leadership, business development, financial services, channel management, product development, and marketing. Mark has expertise in commercial finance, digital marketing, sales enablement and data analytics, internal and external communications, pricing, profit and loss management, and underwriting.