Think about what could happen to your business if your day-to-day revenue and cash flow dried up, even for just a short period. Not pretty, huh? This is why working capital loans exist—so you can have the money on hand to run your business if your cash flow is uneven.
Applying for a working capital loan—and getting approved for one—takes more than just having your paperwork in order. You'll need to have...
1. The right kind of paperwork
Your paperwork should primarily show a lender three things, says Peter Rokkos, a corporate governance expert at the Rutgers School of Management and Labor Relations in Piscataway, New Jersey. Th
- Cash flow: Lenders want to know that you have some cash flow to make payments on the loan.
- Security: Knowing that you have collateral will help the lender feel more comfortable lending you money. (A "just in case" for if you can’t make those payments.)
- Growth: If your company has been growing, that suggests you will keep growing, and that you’ll be able to completely pay off the loan.
In general, Rokkos says, “A lender will ask for a complete financial picture from a borrower including full income statements, balances sheets and cash-flow statements for a meaningful period of time—most likely three-plus years.”
2. A relationship with the lender
You don’t always need a relationship with the lender before you take out a working capital loan, but it can help. In fact, some financial institutions insist on having the business owner as a client for a time before lending money for working capital.
3. A good credit report and score.
You can probably find exceptions, but if your credit history and score is strong, it will certainly help your case with a lender.
Look at cash flow statements, do quarterly reports and balance sheets, if you don't have time to do these yourself, hire a bookkeeper who can produce these for you.
—Julie Kitson, owner, Verdigree Collective
Jesse Silkoff, co-founder and president of online roofing marketplace MyRoofingPal, took out a working capital loan last year to cover the cost of payroll during a particularly bad month. He has since paid it off.
Silkoff suggests that any business owner thinking of taking out a working capital loan request a copy of their personal and business credit scores.
“Most lenders won't offer a loan if you're below a certain threshold, though it varies from lender to lender. Because a working capital loan is a short-term investment, the threshold is usually lower than some other business loans,” he says. “Either way, you need to understand the state of your credit and be prepared to explain any potential liabilities.”
4. Bank statements
“Going back at least six months, though ideally for a year,” Silkoff says. “This will help the lender understand your cash flow and will allow them to determine whether or not you can pay back the loan in a timely manner. You may also need to supply balance sheets, which will reveal any assets not reported on your bank statements and show where else you may have credit currently.”
For those who don’t know the term, a balance sheet is a statement that shows a company's net worth. It’ll have the company’s assets, liabilities and the owner’s equity, and be a good indicator of the business's health.
5. Business taxes
You may need several years of your business tax filings, or you may need less. When Julie Kitson received a working capital loan last year, she had to offer up two years of her businesses’ taxes, among other paperwork.
“My company Verdigree Collective, a construction company, was ready to move to the next level,” Kitson says of why she went after a working capital loan. “I needed to invest in more staff, both for the job site and office. We also used our working capital loan to invest in office equipment in the form of computers and furniture and equipment for the job-site in the form of tools, a truck and a tool trailer.”
6. Other documentation
Kitson also needed to supply a balance sheet, a profit and loss statement (for the previous year and the quarters of her current year) and her accounts receivables, or money that was owed to her.
“My loan processes had a relatively quick turnaround time,” Kitson says. “I attribute some of this to having my financial paperwork organized and easy to access. My advice for any business owner is know your financials. Look at cash flow statements, do quarterly reports and balance sheets, if you don't have time to do these yourself, hire a bookkeeper who can produce these for you. They are very valuable tools to help steer your business.”
Bottom line, says Silkoff, you’re not likely in danger of giving a lender too much paperwork if you’re looking to borrow money to use as working capital.
“The more information you can provide," he says, "the more likely you'll be able to get a loan.”
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