To get a clearer idea of what’s happening in the small business world, it’s often helpful to turn to the Small Business Credit Survey (SBCS). This collaborative resource is compiled by the experts from US Federal Reserve Banks, providing insights into the most pressing demands on businesses and the solutions being sought.
In the most recent SBCS, we learn that 80% of small businesses want to be bigger, and this growth mindset leads more than 40% of them to seek financing. The most common reasons cited for pursuing loans include expanding business operations, pursuing new opportunities, or acquiring business assets.
“Recently, I had the pleasure of meeting and getting to know the owner of a bar in Utah called Legends Sports Pub,” recalls Lendio CEO Brock Blake. “More than just a watering hole, they’ve built a solid reputation in the area as the place to gather to watch college and professional sporting events. For the last 10 years, owner Lisa Forman and her staff have built a loyal following…Lisa told me about Legends’ recent expansion to a second location in another part of the Salt Lake Valley. Despite her business being profitable and well-established, she’d been turned down by banks for a loan to finance the expansion. That’s when she came to Lendio. After running a simple ROI analysis to determine how much they would need, how long it would take to repay, and if the increased revenue could support a second location, everything checked out. Legends secured the funds they needed to renovate their new location and hire about 3 dozen people to staff it. The new pub opened just a few weeks ago, and Lisa is already discussing the possibility of opening a third location.”
This case study was featured on Forbes.com and highlighted some of the basic truths about small business financing. First, it takes money to make money, and successful entrepreneurs know that financing is often a more effective way to grow than bootstrapping. Second, it can be hard for even an established business to qualify for financing. Third, when a business owner finds the right loan from the right lender, the impact is powerful.
Note the emphasis on finding the “right loan.” Just as there are both incredible and dubious businesses out there, the quality of loans available can run the gamut. Your goal is to find a financing option that provides a good interest rate, fair terms, and an ROI that’ll allow your business to truly reach the next level.
The experts at the Fed report that the average business loan in the United States is about $660,000. Does that mean you should seek a loan of that size? Probably not. Your perfect loan might be as small as $2,000 or as large as $2,000,000—what matters is that you do your research and have a plan. If your plan calls for a $660,000 loan, you can chuckle about how random it is that the specific amount you’re seeking happens to align with the national average. Your loan needs to fit your business like a glove, so never use a one-size-fits-all model.
Once you know exactly how much money you’ll need to reach your business goals, you should focus on your funding timeline. If you’re trying to take advantage of a prime business opportunity, you might want to jump into action as soon as possible. Other times you’ll have the luxury of waiting for a more methodical option (SBA loans, for example, can take 3 months to fund).
At this point, you will have assembled a handful of crucial details. For example:
Not only will these facts serve as compass points guiding you to the perfect loan, they’ll also serve as a resume of sorts. When you apply for a loan, your plan reveals your organizational skills, ambition, and zeal. Lenders rely heavily on this plan as they review your application and decide whether or not to give it the green light.
Finding the right loan to apply for is part science and part trusting your gut. You’ll want to use metrics such as Total Cost of Capital (TCC), Annual Percentage Rate (APR), Average Monthly Payment, and Cents on the Dollar. Your analysis can be simplified using a business loan calculator or a comparison tool like SMART Box. The more you know, the better able you are to make a confident decision.
There are countless financing products in the world, but most small business owners seek one of the following:
Each financing product offers its own benefits, and qualifying for the best option provides the fuel needed for business success. Whether you hope to repair existing equipment, purchase new equipment, add vehicles to your fleet, boost your working capital, upgrade your existing building, expand to new locations, shore up your inventory, or launch a new product, financing might make the difference between accomplishing your goals and coming up short.
Given the major implications of your financing search, you should leverage every resource available throughout the process. Start by talking to colleagues to find out which loans have worked for them and which red flags to avoid. The shared wisdom of other business owners can often expedite your success.
Business mentors provide you with another valuable resource. Seek your mentor’s recommendations on what financing products could work best and how you should go about obtaining them. By talking to someone who has already achieved the type of success you’re ultimately seeking, you’ll get even closer to your goals.
If you don’t have a business mentor, touch base with the SCORE office in your area. You can also reach out to your local Small Business Development Center. Both of these sources can provide trusted advice and user-friendly tools.
Taking out a business loan is always a personal decision—but it should never be made alone. By drawing upon the knowledge and resources of others, you can make an informed decision to help your business thrive. There are many reasons that successful business owners embrace financing, so it’s crucial to find the reasons that are uniquely yours.