As small businesses grow, they’re often working to expand marketing and sales, add operations and production capabilities, and build the organization’s management strength. Each stage has its own funding needs. So, where can you go to find the funds that you need? How do you build credit for your business at each stage of growth?
Common myths about applying for small business loans
Many small businesses don’t apply for loans because of common misconceptions about what loans are used for and the application process. Debunking these myths will help you consider if you should apply for a loan.
Lenders only lend to businesses that don’t need the money. If that were the case, lenders wouldn't make many loans.
“Make no mistake, lenders want to make loans to businesses that can use those funds productively to generate profits and pay back the loan,” said Zachary Sink, small business lending product manager at Truist. “They look for signs that usually mean a business will pay back the loan—like profitability in a business’s current product line and the ability to put equity towards the loan.
Lenders also look for ways to reduce their lending risk with collateral—assets that a business agrees to pledge to the lender to secure the loan. Businesses with a sound plan for using the funds, a profitable business, an equity injection, and solid collateral have a better chance for a loan.
- Debt means my business isn’t profitable enough. Fast-growing businesses often need more cash than they can generate as they hire employees, buy inventory, and extend payment terms to their customers. Extra funding allows you to expand your business quickly, invest in growth opportunities (like marketing and sales), and have reserves to cover cash flow fluctuations. Applying for financing should be viewed as a proactive investment in growth, not a crutch when sales are down. Keep the story positive—it will improve your odds of finding financing.
- Applying for a loan is a hassle and will take a lot of time. Digital applications, automation of credit scores, simplified bank underwriting, and more make the procedure more effective. A good lender can help you get through the process efficiently.
- If you get rejected by one lender, you’ll be rejected by all. Different lending institutions have different levels of risk they’re willing to accept and permitted industries to which they lend. Other business owners in a similar position to yours can provide advice on where to apply. Bankers value relationships, so you should look at any financial institution where you currently hold accounts, either personal or business.
- The more you ask for, the more likely your loan application will be rejected. Lenders want to see that you’ve thought through what you need and what you can pay back. Ask for what you’ll need without exaggerating your request or asking for less than you really need—the lending institution may look at your situation differently and can adjust your request if necessary.
Setting yourself up for success
A successful loan request starts with a thriving business. Understand your financial position. Create the cash flow that supports paying back a loan. Build a credit record that shows you take care of your obligations on a timely basis. Consider lending for investments or purchases that can generate profits, where you can commit equity, and where you can offer the lender collateral to back up your promise to repay. That’s the foundation of a successful loan request.
The following tips will help you secure the funds you need, no matter what stage of business growth you’re in:
Create a solid growth plan. The story that ties together your vision, a clear path on how you’ll get there, and the achievement of successful milestones is important to any lender. You want to show that your business can grow and scale operations and that your finances tell that story. A business plan doesn’t have to be long or overly detailed, but it does need to communicate an understanding of the competitive landscape and your differentiation, target market, product offering, marketing and sales plan, operations, and financial results.
Show that you can put the funds to work to generate sales and profits. “You’ll need to show that the loan makes sense and is worth the risk,” Sink said.
Whether your loan request will add new sales and profits (like opening a new location) or is needed to support existing sales and profits (like replacing a worn-out vehicle), forecast the cost of the opportunity and what the expected return will be.
“If you can justify the loan to yourself, you can easily make your case to a lender,” Sink said.
Choose whether you’ll expand with debt or equity. For added funding, you’ll have the option of financing via debt (loans from an outside source) or equity (family/friends or formal investors who will have an ownership stake in your business). Our Borrowing for Small Businesses Guidebook outlines the pros and cons of each option. With debt, you’re obligated to pay back the money, but you get to keep full control of your business. With equity, investors—which may include you as the owner—expect to get paid back through profits and dividends or the long-term sale of the company. Since the payback is an expectation, not an obligation as with debt, equity investors are accepting some of your business risk and will want a higher return on their investment and potentially a higher level of involvement in decision making along with more reporting on actions and results along the way.
Build up solid business and personal credit. Past credit is a strong predictor of whether financing will be approved and at what interest rate. Building credit takes time, so pay your bills on time (both for personal and business accounts) and monitor your credit scores regularly.
The small business credit journey
As your business grows, your needs and options for credit also evolve. There are different financing options along the way.
Some lenders require two years of business financial statements before awarding a traditional loan, but there are other options. Start-ups can often get short-term financing by using business credit cards, and Small Business Administration (SBA) business loans—guaranteed by the U.S. Small Business Administration—can provide more flexibility. Providing collateral using existing assets or items to be bought with the loan proceeds helps at this stage. Many start-ups use personal savings or loans (such as a home equity loan on the owner’s personal property). Friends and family can also provide funds.
Helping with cash flow and general operations as you grow
As your business grows, you often need to add operations, increase production and, likely, hire staff. Your cash flow becomes more complex and a top priority. If you need cash to fund your expansion, you might turn to a secured business loan. Talk to a Truist banker about your best lending options.
Financing business expansion
A traditional loan from a bank starts with a strong business case and supporting documents.
New equipment or vehicles
If your expansion plans involve buying a new piece of machinery, equipment, or transportation, you can either lease or obtain a loan to make the purchase. With either choice, you can spread the cost of a large purchase over time instead of paying the whole cost upfront.
With a loan, you’ll own the equipment or vehicle at the end of the loan. With a lease, you pay a monthly amount to use the equipment. Leasing tends to be more expensive but can reduce your risk and, in many cases, improve your balance sheet. Your accountant can help you choose the best option for your specific circumstance.
A mortgage on a commercial property can be used to buy your current location or expand your operations into a new area. Because mortgages are secured by the property, terms and rates are generally more favorable than other lending options. They help keep payments low by extending repayment over a longer period, and those payments can be used toward purchasing (and eventually owning) an additional real property asset. There’s often a requirement for a substantial down payment—your accountant can help you decide what’s best for your situation.