Small business loans fall into one of two types –– asset-based and factoring financing. Each loan requires different documentation and has different requirements, allowing you to choose the one that works best to keep your business going.
Decide on Loan Type
Asset-based loans are similar to traditional loans and require extensive documentation to show both that you are personally credit-worthy and that your business can keep up with the payment plan. Many financial institutions use the Small Business Administration’s 7(a) Loan Program to guarantee asset-based loan so there’s less risk to the lender.
If you just need short-term funding, consider a factoring loan, sometimes referred to as accounts receivable financing to cover a cash shortage. Factoring involves selling your accounts receivables to get a short-term loan. You'll get less than the balances owed, with the specific amount dependent on your industry and the perceived risk that any of the debts will go unpaid.
Qualifying for an asset-based loan generally requires a credit score that’s in the 700 to 800 range and up, according to Forbes. You may still qualify with a score in the 650-700 range. If you’ve been in business for at least a couple of years and can show a strong history of sales as well as reliable cash flow, you’re more likely to get the loan than a startup. You’re also more likely to get a loan if you have collateral with which to secure the loan, such as equity in real estate or an investment portfolio.
The bank requires fewer qualifications for a factoring loan. As long as you’ve set up your business properly and have a history of positive cash flow, you likely qualify.
Develop a full business plan for asset-based loans. The plan explains your company’s strengths, weaknesses, opportunities and threats, also known as a SWOT analysis. Describe how your background and education help you run the business. Add financial data, including profit and loss statements for the past three years, if available. Include cash flow statements, a current balance sheet and three years of personal tax returns. Use the executive summary of your business plan to explain why you need the money and to tell your company’s unique story so the lender understands where your business is headed.
For factoring loans, you need an accounts receivables report that shows invoices for the past 90 days. Plan to complete an invoice factoring application and include business documentation that shows your company is set up with the proper government agencies, such as state and federal tax authorities.
Poor Credit Issues
Without a strong credit rating, your chances of getting an asset-based loan are greatly diminished. The SBA recommends providing additional documentation as part of your business plan if your credit score is weak or you have experienced bankruptcy. For instance, include bank deposits that show you make regular ongoing deposits and have positive cash flow. Another option is to find a credit partner who has a preferable credit score who is willing to co-sign for the loan.