How to (finally) get that loan approved

Debt can be a powerful tool for small businesses when used wisely, but it can also become a burden if not managed properly.

So, what is debt?

Simply put, debt is money you borrow from a lender that you agree to pay back with interest. It’s often necessary for businesses to fund growth, cover expenses, or invest in new opportunities. But understanding how debt works and the different types of loans available is crucial to using it effectively.

Common Types of Business Loans

1. Term Loans

Term loans are the most straightforward type of debt. You borrow a lump sum of money and agree to pay it back over time with interest. They’re great for one-time expenses like equipment or expansion. However, be sure to consider the repayment schedule and interest rates, as they can be costly if not managed well.

2. Purchase Order Financing (PO Financing)

PO financing is used when a business receives a large order but lacks the capital to fulfill it. The lender provides the funds based on the value of the purchase order. Once the customer pays, the loan is repaid. This option works well for businesses that need short-term financing to complete large orders but don't have the resources upfront.

3. Line of Credit

A line of credit is a flexible loan where you’re approved for a certain amount of credit, and you only borrow what you need. You can use it to cover short-term cash flow gaps, such as waiting for payments from clients. It’s often ideal for businesses with fluctuating expenses.

Key Considerations When Taking on Debt

Before taking on debt, consider these factors:

• Repayment Terms: Make sure you can meet the repayment schedule without overburdening your business.

• Interest Rates: Be aware of the interest rates and how they’ll impact your overall cost of borrowing.

• Lender Requirements: Different lenders have different approval criteria, including credit history and financial health.

Debt can help propel your business forward, but it’s important to understand the right type of loan for your specific needs. By choosing the right financing option, you can boost growth while keeping your business on solid financial ground.

Understanding Your Business Financials and How to Secure Funding

When seeking funding for your business, understanding your financials is crucial. Your balance sheet, cashflow, and profit & loss (P&L) statements provide a snapshot of your business’s financial health, helping lenders assess your ability to repay loans.

A balance sheet shows your assets and liabilities, while a cash flow statement reveals how money moves in and out of your business. By keeping track of these, you can make better decisions and maintain stability.

When it comes to debt, it’s essential to match the right loan to your business need—whether for inventory, marketing, or growth. The key to securing funding is aligning the amount you borrow with what your business can afford. This is where your debt coverage ratio (DCR) comes in. It measures your ability to repay loans by dividing your income by your debt obligations. A DCR above 1 is ideal for demonstrating that your business can handle the loan.

By keeping your financials in check, understanding the right type of debt, and using the DCR to guide you, you’ll be better positioned to secure the funding your business needs to grow.

Episode paraphrased using AI