The 5 Cs Of Credit: What Lenders Look For

You’ve heard the old adage “walk a mile in someone else’s shoes.” This phrase is more than just a To Kill A Mockingbird lesson on understanding where others are coming from — it’s also the key to securing the business loan you need.

By considering the loan process from the lender’s perspective and understanding what they’re looking for, you’ll know exactly what you need to do to increase your chances of being approved for a business loan.

That’s where the 5 Cs of Credit come in.

The 5 Cs of Credit is a system that lenders use to evaluate your business’s creditworthiness and ability to repay a loan. Lenders look specifically at your business’s character, capacity, capital, collateral, and conditions before making their lending decision.

In this post, we’ll explain everything you need to know about these 5 Cs, including how lenders evaluate each trait and how to boost your business’s 5 Cs so you can secure a business loan. Read on to learn more.

Character

Character refers to a business’s reputation and trustworthiness. Also sometimes called “credit history,” character often translates to how faithful you’ve been in paying off past debts on time.

Why Character Matters

For lenders, it all comes down to how the question: “Will I get my money back?” Lenders want to work with responsible, organized businesses that are likely to make their repayments on time.

How Lenders Evaluate Character

When evaluating character, lenders look at:

  • Credit report
  • Credit scores
  • Personal qualities
  • References

To analyze your credit history, lenders will often view your credit report and credit score. Lenders take both your business credit score and your personal credit score into consideration.

They tend to look at how long you’ve been in business as well. The longer you’ve been in business, the more stable you appear. For lenders, this again means less risk and increased likelihood that your business will be successful enough to cover loan repayments.

Sometimes, lenders also take a literal approach to the word “character” and analyze your attributes as a business owner.

They may conduct a personal interview or require references (some even go so far as looking at Yelp reviews of your business). Many online lenders make phone consultations a part of their application processes so that they can help you with any questions about the application while also getting a feel for you and your company.

How To Improve Character

If you’re looking to impress lenders with your personality or improve the character of your business, there are a few ways to do so. Here are fours tips for boosting character:

1. Raise Your Credit Score

Poor credit can be a deal breaker when it comes to loan approval. Taking the extra time to raise your credit score before applying for loans can help increase your chances of qualifying for the loan you want.

If you don’t know what your credit score is, then that’s the first place to start. Check out these top free credit score sites to learn where your credit stands.

2. Understand Your Credit Report

It’s also important to understand your credit report and be prepared to explain anything negative on your report. Some lenders may view your application more favorably if you are able to help them understand your business’s situation. Make sure to take action to correct any errors that may be affecting your credit report.

Learn more about how to check your credit report and dispute errors by reading 5 Tips To Improve Your Personal Credit Score.

3. Be Professional

Whether interacting with a banker in person or applying through an online lender, put your best foot forward. Always be professional and kind. Also show the lender that you are knowledgeable about the loan application process and familiar with how loans work. This shows that you are responsible and experienced in business as well as being personable.

4. Establish A Relationship With Your Bank

If you are seeking a traditional business loan from a bank, establish a relationship with your banker. If the banker likes you and is familiar with your business, they may be more willing to vouch for you when it comes to loan approval time.

Capacity

Capacity is your business’s ability to pay back the loan. Also sometimes called “cash flow,” capacity is directly related to how much cash your business has available for loan use.

Why Capacity Matters

Not only do lenders want to see that you have a history of paying your loans on time, they also need to see that you actually have the cash to do so. They must look at your financial health to ensure that you can afford a loan in the first place, and then use this information to see how large of a loan amount they can offer you.

How Lenders Evaluate Capacity

Lenders may use the following tools to determine your business’s capacity to afford a loan:

  • Cash flow statements
  • Cash flow projections
  • Bank statements
  • Debt service coverage ratio (DSCR)
  • Debt-to-income ratio (DTI)

Most lenders require you to provide cash flow statements and bank statements when you apply for a loan. They also may require a cash flow projection to get an idea of what your cash flow will most likely look like in the future.

Some lenders may depend on more concrete measures of financial health, like debt service coverage ratios (DSCR) and debt-to-income ratios (DTI). The debt service coverage ratio measures the relationship between your business’s debt and income, while the debt-to-income ratio measures the relationship between your personal debt and income as the business owner.

Both of these ratios are used to determine the health of your business’s cash flow and demonstrate how much extra cash you have available for a loan. Ideally, lenders look for a DSCR of 1.25 or higher and a DTI ratio of 36% or lower.

How To Improve Capacity

The following are four tips for maximizing your business’s capacity; following these steps will demonstrate that your business can handle a loan and may also increase the size of the loan that you can realistically afford to make payments on.

1. Pay Down Past Debt

If you have a significant amount of outstanding debt, a serious chunk of change is going to paying those loans off each month — money that could be used to invest in a new loan instead. Try to pay old debt down or off completely. This will increase the amount of cash flow available for a new loan. This will also show a lender that you have the means to repay a new loan and that you have a history of successfully paying off debts.

2. Improve Your DSCR

The higher the debt service coverage ratio, the more cash you have to invest in your business and the more likely you are to be approved for the loan you want. To improve your DSCR, try:

  • Increasing your net operating income
  • Decreasing your net operating expenses
  • Paying off existing debt

Read Debt Service Coverage Ratio: How To Calculate And Improve Your Business’s DSCR to learn more.

3. Lower Your DTI

While lenders usually place more emphasis on the debt service coverage ratio, your debt-to-income ratio is still important. And, if you’re self-employed, lenders look solely to your DTI ratio to determine if you can afford a loan.

Since the DTI percentage shows how much of your money is already committed to existing debt, the lower your debt-to-income ratio, the better. Here are the main ways to lower DTI:

  • Increase your monthly income
  • Pay off existing debt

Read Debt-To-Income Ratio: How To Calculate And Lower Your DTI to learn more.

4. Use Accounting Software

Not only can using accounting software help you balance the books, it can also help you prepare a strong business loan application. With the right accounting software you can:

  • Generate the cash flow statements and financial statements required by lenders
  • Use financial history to create cash flow projections
  • Keep track of operating expenses and income so that you can calculate DSCR and DTI correctly

Using accounting software can also show lenders that you are organized and financially responsible. Some lenders even require that businesses use accounting software for a certain period of time before being approved. If you want to make preparing your loan application simpler, understand exactly how much you can afford to borrow, and stay in control of your business overall finances, accounting software is a must.

Take a look at our top-rated accounting programs and our comprehensive accounting reviews for help finding the perfect software for your business.

Capital

Capital refers to how much money you (or you and your business partners) have invested in your company.

Why Capital Matters

In lenders’ eyes, the more money you personally have invested in your business, the less likely you are to default on your loans. Lenders see capital investments as a sign that you take your business seriously, and have something to lose if the business goes under.

It makes sense — if you have money personally invested in your business, you are much more likely to do everything you can to make that business succeed — which for lenders, translates into doing everything you can to pay your loans off.

How Lenders Evaluate Capital

When considering capital, lenders want to see:

  • How much of the owner’s capital is invested in the business
  • How the owner’s capital is invested

Lenders primarily look at the amount of owner’s capital invested in the business. Not only do they evaluate how much money you have invested in the business, they also check to see where you’ve invested that money. If they see that you’ve made smart investment decisions in the past, they can take comfort in knowing that you will most likely invest a new loan wisely.

How To Improve Capital

If you’re looking to present strong capital to a lender, here’s what you should do.

1. Increase Owner’s Capital

First off, make sure that you actually have money invested in your business. If you haven’t invested any money into your business, now may be the time to talk to a financial advisor about the best way to increase your owner’s capital and invest in business growth.

2. Highlight Investment Successes

Lenders like to know exactly how you plan on using the money they may potentially lend to you. If you’ve made successful investments in the past, like purchasing additional equipment that increased your sales revenue by 25%, and are planning on purchasing more equipment with the loan your applying for, be sure to tell your lender! It will demonstrate that you’re experienced in business and that you’re likely to increase your cash flow (which a lender hears as “we’re getting our money back”).

What If You Don’t Have Any Capital Invested In Your Business?

If you don’t have any capital invested in your business and aren’t in a financial place where you can do so, you’ll need to rely heavily on the other 4 Cs. If your character, capacity, collateral, and conditions are particularly strong, you may be able to offset the lack of capital.

Since lenders use capital to see that you’re committed to your business, show them your commitment in other ways, maybe by offering strong collateral or articulating a clear business plan and repayment plan.

Collateral

Collateral is an asset (or assets) that are offered up as insurance against you paying back your loan fully and on time. If you default on your loan, lenders will seize the collateral in order to make up for their losses.

Why Collateral Matters

Much like owner’s capital, collateral means you have something to lose if you default on your loans. The hope for many lenders is that the collateral will encourage business owners to work hard to repay their loan.

However, if your business does go under, collateral assures lenders that they won’t lose all of their money if you default on a loan.

How Lenders Evaluate Collateral

Every lender has different requirements when it comes to collateral.

Some require specific assets to be offered up as collateral. Others require a blanket lien, meaning they have the right to go after your assets in case of a default. Others still require a personal guarantee, meaning you the business owner will be held responsible in the event of a default.

Some examples of collateral include:

  • Property
  • Vehicles
  • Equipment
  • Savings accounts

It’s important to carefully evaluate each lender’s policy and requirements regarding collateral. This way, you can know exactly what is expected of you. And, more importantly, you can decide if you’re comfortable with the required collateral or if you’d rather look for a different lender.

To learn more about collateral, read Secured Vs. Unsecured Business Loans.

How To Improve Small Business Collateral

Each lender has their own way of evaluating collateral, so there’s no one right way to improve your business’s collateral. However, by carefully researching potential lenders, you can work to present strong collateral that meets their standards. Here are a few tips to consider:

1. Know What Collateral You Have To Offer

Carefully evaluate your assets and their value so that you know exactly what your business can offer up as collateral. Many accounting software programs help you track your assets and their depreciation so you can know how much they are worth.

2. Decide What You’re Comfortable With

As we mentioned earlier, some lenders require a blanket lien or a personal guarantee to secure a loan. Neither of these agreements should be taken lightly and these arrangements are not right for every business.

Read our posts What Is A UCC Blanket Lien? and Should I Sign A Personal Guarantee? to decide if these forms of collateral are right for you.

3. Find The Right Lender

Required collateral varies from lender to lender. If you aren’t comfortable with something like a personal guarantee or don’t have much collateral to offer up, do some shopping around until you find a lender that is suited for your business.

If you need assistance in your search for the perfect lender, let us help you find a business loan.

Conditions

Conditions are considered in two parts: the conditions of the loan and the conditions of the economy.

Why Conditions Matter

Conditions such as interest rate and principal play an important factor in whether or not you can afford a loan and how big that loan can be. Factors such as the economy and your business’s market can also play a role in how likely your business is to succeed and be able to repay a loan.

How Lenders Evaluate Conditions

When considering if the conditions are right to approve your loan, lenders consider:

  • Interest rate
  • Principal
  • Economy
  • Your business’s industry
  • Your business’s competitors

The actual loan amount you are requesting is very important, but lenders will consider the principle, interest rate, and monthly payments to determine if you can feasibly take on that loan.

Lenders also carefully consider how you are planning on using the loan as the purpose of the loan can greatly affect whether your business will grow and profit from the investment.

The economy is also a huge consideration. If the economy is booming, businesses are more likely to flourish, meaning less risk for lenders. If the economy is taking a downturn, lenders may be more reluctant to lend money. When the economy is poor, lenders typically increase their minimum DSCR which means businesses have to have an incredibly strong cash flow in order to be approved.

Some lenders may look at your specific market and competitors to get an idea of how financially promising your business is. Certain lenders also have prohibited industry lists, meaning that they will not lend to business in specific high-risk industries. So before you apply, be sure that your business does not fall into that category.

How To Improve Conditions

You may not be able to control the economy, but you can control how strong your business and its loan application appears. Here are a few tips on how to put your best foot forward where conditions are concerned.

1. Have A Plan

Don’t just say you need $30,000 for your business. Lenders want to hear exactly what you’re planning on doing with the loan and how you plan on doing it.

Common reasons for requesting a business loan include:

  • Purchasing inventory
  • Purchasing property
  • Updating equipment
  • Hiring new employees
  • Expanding your business
  • Increasing cash flow

Let your lender know exactly how you’re planning on using the money with a detailed business plan. Increase their faith in your business by showing how the loan will benefit your business, whether by increasing production, doubling sales, expanding your business’s services, etc. The more specific you can be the better.

2. Time It Right

Often, small businesses seek a loan when they are in need of money. Makes sense, right? Wrong. Consider applying for a line of credit when the economy is good and your business is booming. You will be much more likely to qualify for a line of credit with favorable terms when things are going well. This way, you’ll have cash when you do need it.

If you wait until the economy is poor and your cash flow is stagnant you will be much less likely to be approved for a loan. And if you are approved, the loan rates may be steep and unfavorable.

3. Show Your Expertise

Be knowledgeable about your business and its market. You can’t control the economy, but you can control how you present your situation to a lender. If the economy is poor or your business’s market is stalling, show lenders how the loan you’re requesting will allow you to launch a promising new marketing campaign or expand into a new, profitable business vertical.

Demonstrating your expertise will build their faith and trust in you and your business.

4. Improve Your DSCR

If the economy is poor, another way to increase the likelihood of being approved for a loan is to increase your debt service coverage ratio. As we mentioned earlier, there are several ways to improve your DSCR, including:

  • Increasing your net operating income
  • Decreasing your net operating expenses
  • Paying off existing debt

Read our post the Debt Service Coverage Ratio: How To Calculate And Improve Your Business’s DSCR to learn more.

Sealing The Deal

When it comes to loan applications, you don’t want to go in blind. Knowing what lenders are looking for and how they’re evaluating your application can be the key to securing the loan you need.

When it all boils down, lenders simply want to be certain that you will pay back your loan. The 5 Cs of Credit are how lenders can realistically evaluate how big of a risk you are.

It’s important to note that not all lenders evaluate each C the same way. Some place more emphasis on character, while others care more about your capital. Carefully researching each lender’s requirements and following our tips to master each of the 5 Cs of Credit can greatly increase your chances of sealing the deal on a loan.

In the end, it all comes down to establishing yourself as a trustworthy, credible borrower who can set lenders’ minds at ease. Start mastering character, capacity, capital, collateral, and conditions to impress lenders and secure the loan you want.

Ready to take out a business loan? Read through our comprehensive reviews of business lenders, put lenders side by side with our small business loans comparison chart, or check out three of our favorite lenders below:

StreetShares OnDeck LoanBuilder
Products Offered • Term loans
• Lines of credit
• Contract financing
• Term loans
• Lines of credit
• Short-term loans
Best For Small- to medium-sized businesses looking for a working capital loan or line of credit. Small- to medium-sized business looking for fast funding. Small businesses looking for a short-term loan with weekly repayments.
Required Time in Business 12 months 12 months 9 months
Required Revenue $25,000 /year $100,000 /year $42,000 /year
Required Credit Score 620 500 550
Read Review Read Review Read Review
Visit Site  Visit Site  Visit Site

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Franchise Financing: The 7 Best Places To Get A Franchise Loan

franchise loan

Opening a franchise can be a smart choice for an aspiring entrepreneur. Becoming a franchise owner gives you the flexibility of owning your own business with the added security of being part of an established brand. However, as with owning any new business, startup costs can be high and you may require infusions of capital if you encounter slim times. Franchisees must also pay a franchise fee when opening a new franchise, as well as ongoing royalty fees.

Assuming you don’t have upwards of $100,000 set aside, how can you get the capital you need to open a franchise, purchase an existing franchise, or keep your franchise business functioning optimally?

Most franchisees will have to get a business loan at some point. Fortunately, compared to independent small business owners, franchisees have traditionally had an easier time securing financing from banks — including loans backed by the SBA (Small Business Administration). But bank loans and SBA loans are still not easy to get even for franchise businesses, and the application and approval process can be prohibitively long for a lot of franchisees in need of quick capital. Some franchisors offer their own financing programs, but the practice is far from widespread.

For these reasons, many franchise owners are turning to the alternative lending space. Online lenders are generally more lenient in their borrower requirements and they also offer a much faster time to funding than traditional bank loans, often depositing funds in your account within a week of receiving your application.

What follows are some of the best online loans for franchise businesses. Note that the order in which I’m presenting these lenders does not reflect their ranking; they’re all pretty great, and the best choice for you will depend on your business’s particular requirements.

1. ApplePie Capital

ApplePie Capital (see our review) is an online lender that specializes in franchise financing. Founded in 2014, ApplePie was one of the first online lenders to offer franchise financing. After recently acquiring another franchise lender, ApplePie has expanded its offering to include SBA-backed loans, equipment loans, and conventional loans, in addition to its original “core” 3-7 year loan.

ApplePie currently has partnerships with 42 franchises, such as 7 Eleven, Dunkin’ Donuts, Jimmy John’s Pizza, and Wetzel’s Pretzels. Other franchise brands can get loans through ApplePie, though the process might take a little longer. ApplePie offers loans for both new and existing franchises, including franchise startup loans, loans to purchase an existing franchise, franchise equipment loans, franchise refinancing loans, and more.

Some things we like about ApplePie Capital include reasonable interest rates, relaxed borrower qualifications, and easy application. Read our ApplePie Capital review to learn more about their online franchise loans.

2. Funding Circle

Funding Circle (see our review) was established in 2010 when one of its founders started a gym franchise and realized how difficult it was to obtain funding. Today, Funding Circle has numerous franchise partners across the US, including Papa John’s, Pinkberry, Quiznos, and many others.

Offering medium-term installment loans with repayment periods as long as 5 years, Funding Circle is a lending partner for established franchisees with a strong credit history. Specifically, you’ll need to own a franchise at least two years old and have a credit score of at least 620. For qualified applicants, Funding Circle has the advantages of offering faster funding than a bank loan would, as well as offering relatively low rates and fees.

While Funding Circle’s application process takes longer than that of some other online lenders, it is still much quicker and easier than getting a bank loan. Funding Circle is not suitable for aspiring franchisees who haven’t opened up shop yet, but it should definitely be on your short list if you have an existing franchise.

Read our Funding Circle review to read up on this franchise loans provider.

3. SmartBiz

SmartBiz (see our review) is a viable online loan option for franchise owners that want the security and low-interest rates of an SBA-backed loan, but with the ease and speed of an online loan. SmartBiz is the #1 marketplace for SBA 7(a) small business loans online, offering an SBA/online loan hybrid with low interest rates and long-term repayment terms. However, this lender is only an option for established franchises — you’ll need at least 2 years’ time in business to get a working capital or debt refinancing loan, and 3 years to be eligible for a commercial real estate loan.

SmartBiz does not originate loans. Rather, it is a service that matches business owners with SBA-preferred banks. If you don’t qualify for an SBA loan, SmartBiz can match you with one of its non-SBA partners to secure a loan. While SBA loans have the lowest interest rates and longest repayment terms — up to 10 years for most loans — you might still be able to get a medium-term non-SBA loan with an interest rate as low as 7.99% through SmartBiz.

We love this lender for their sterling reputation, excellent customer support, and reasonable terms and rates. But again, you’ll need to already have an established franchise to qualify, as well as good credit. This loan also takes longer to apply for (and receive) compared to most other online loans, and it can potentially take a couple months for the money to come through. You’ll need to submit all the documentation you’d need to get a traditional SBA loan, and it will be helpful if your franchise is already listed in the SBA Franchise Directory. Even though there are a few more hoops to jump through than with other alternative lenders, SmartBiz is still one of the quickest ways for a franchisee to get an SBA loan.

Check out our SmartBiz review to learn more about this SBA lender.

4. OnDeck

If you have a newer franchise or need capital ASAP, OnDeck (see our review) is one of the easiest and quickest ways to get a short-term loan or line of credit. Though OnDeck isn’t specifically geared toward franchise owners, it’s a viable online loan option for any type of small business owner that doesn’t qualify for a bank loan or doesn’t want to wait months to receive loan funds. OnDeck also recently partnered with the Franchise Council of Australia in an effort to better serve the global franchise market (fun fact: Australia actually has more franchise outlets per capita than America).

OnDeck’s borrower requirements are much more relaxed than those for a bank or SBA loan, and time-to-funding is super speedy; the entire process from starting your application to receiving your funds normally only takes a couple days.

Short-term loans like the ones offered by OnDeck have higher rates and fees compared to longer-term loans. Effective interest rates start at 9.99%, and if you have a newer franchise and/or poor to fair credit, your rate will likely be higher than that. Nevertheless, OnDeck is one of the few reputable sources of short-term, unsecured business loans offered to franchise owners, and also one of the fastest. OnDeck is additionally one of the few online franchise lenders willing to lend to applicants with poor credit.

Read our OnDeck review for more information on this recommended lender.

5. Fundation

Fundation (see our review) is another high-quality alternative lender that provides capital to franchise businesses. Fundation has some of the lowest rates and fees you can find outside of a bank or credit union, offering up to $500,000 deposited in your account within a couple weeks after applying. However, the borrower requirements are more stringent than those for other some online lenders, as you’ll need good credit, one year’s time in business, and at least three full-time employees.

Fundation offers an 18-month line of credit in addition to 1 – 4-year installment loans. The time from application to funding generally takes between 2 and 7 days. All in all, Fundation is a smart choice for established franchisees that don’t want to wait months to get a loan approval. Read our Fundation review to find out why we rate this alternative franchise lender 5/5 stars.

6. StreetShares

StreetShares (see our review) is a P2P lending service that brings together business owners and investors. StreetShares is especially geared toward veteran-owned businesses. Indeed, owning a franchise can be a good transition for veterans transitioning to civilian life. However, even if you’re not a veteran, you can still use this innovative loans marketplace to get an unsecured short-term business loan or line of credit of up to $100,000. You will need to have been in business a year, or in some cases only 6 months, in order to qualify.

Some things we like about StreetShares include its excellent customer service, easy application, competitive rates, and speedy time-to-funding. You don’t even need to put up any business collateral for a StreetShares loan (though you will need a business guarantor who is willing to essentially “co-sign” your loan). Another thing that makes StreetShares special is that franchise owners who are also veterans and/or who have an interesting business backstory are preferred. See our StreetShares review to learn more about this alternative lending leader.

Final Thoughts

Alternative business lenders are comprising a growing part of the financing industry as bank loans become increasingly hard to get. Franchise owners benefit from alternative loans, which have less-strict borrower qualifications than traditional business or SBA loans, and also put the funds in your account a lot faster. Generally, alternative loans have higher rates than bank loans, but they represent an important source of capital to many small business owners, including franchise owners, who would not otherwise qualify for financing. Moreover, some of the best online lenders offer rates that are on par with big banks.

Here’s a quick roundup of which alternative lender will best serve your particular franchise needs:

  • ApplePie: Startup-friendly franchise loans
  • SmartBiz: SBA loans for franchises
  • OnDeck: Bad credit-friendly franchise loans
  • Fundation or Funding Circle: Loans for established franchisees with good credit
  • StreetShares: Veteran-friendly franchise loans

Keep in mind that whenever you’re applying for a business loan, it’s a good idea to apply for more than one loan so you can compare rates and terms. Most lenders will only do a “soft” pull on your credit in the pre-qualification stage and will not do a hard pull (the kind that dings your credit score) unless you accept the loan offer. Happy applying!

The post Franchise Financing: The 7 Best Places To Get A Franchise Loan appeared first on Merchant Maverick.

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How To Get Small Business Loans For Restaurants

Restaurants have a (somewhat unfair) reputation for being especially risky businesses that are hard to get off the ground. The good news is that restaurant business loans aren’t especially hard to find, even if you’re looking for a loan to open a restaurant.

Want to know how to get restaurant financing or a loan to open a restaurant? Below, we’ll look at how to finance your restaurant with working capital. If you’re specifically looking to finance restaurant equipment, check out our companion post on restaurant equipment leasing.

Comparison Chart

fundation logo
Read Review Read Review Read Review Read Review Read Review
Borrowing Amount  $10K – $5M $10K – $5M $2K – $100K $20K – $500K $1K – $5M
Term Length Varies by product Varies by product 3 – 36 months 1 – 4 years Varies by product
Required Time In Business Varies by product Varies by product 1 years 12 months 6 months
Required Sales $1.50 for every $1 borrowed $100K/yr $10K/mo
Required Credit Score 640 670 620  660 550

 

kiva logo avant logo
Read Review Read Review Read Review Read Review Read Review
Borrowing Amount  $5K – $500K $5K – $500K $6K – $5M $25 – $10K $1K – $35K
Term Length 3 – 36 months 13 – 52 weeks 6 – 12 months 3 – 36 months 2 – 5 years
Required Time In Business 6 months 9 months 6 months N/A N/A
Required Sales $10K/mo $42K/yr $120K/yr N/A N/A
Required Credit Score 550 550 600  N/A 600

Where To Get Restaurant Business Loans

Most traditional and alternative lenders, at least on paper, offer restaurant lending services. Typically, your ideal option for restaurant funding is a bank or credit union with whom you have an established relationship. In most cases, they’ll offer the best rates and terms.

If you or your business are too risky for a traditional lender, however, there are still restaurant financing options in the form of alternative lenders.

The Cost Of Restaurant Financing

Before we look at your restaurant funding options, you want to be able to compare the offers you might come across.

Here are some of the data points to consider when comparing restaurant loans:

  • Term Length: The amount of time you have to pay back your loan. The longer the term, the higher your interest or factor rate will usually be.
  • Interest/Factor Rate: A percentage or decimal multiplier that determines the amount of money you have to pay back. For short-term loans, this may be a flat fee rather than accumulate over time.
  • Origination Fee: This is a closing fee some lenders charge in addition to interest. It’s either a percentage of the amount you’re borrowing (1% – 5% is typical) or a flat fee. In most cases, it will be deducted from the amount of money you receive from the lender.
  • Administration Fee: This is a fee charged to maintain or set up your account. It may be a percentage or a flat fee. Sometimes charged in place of an origination fee.
  • APR: Annual percentage rate represents what your effective interest rate over a year would be. This can help you determine how expensive a product is relative to another.
  • Payment Schedule: If you’re used to monthly billing, you may be surprised to hear that some lenders expect payments weekly or even daily. May sure you’re prepared for whatever terms you accept.
  • Collateral: An asset, property, or cash deposit used to secure a loan. Not all loans require collateral.

Types Of Restaurant Business Loans

Restaurant loans and related products come in a few different forms. When you’re looking for a lender, you’ll also want an idea of the type of financial product you’re seeking. All of these products will get you the money you’re seeking, but with different terms. Some are cheaper; others are more versatile. Some are more available to applicants with bad credit.

  • Term Loans: Term loans are for a specific amount that, once received, is paid off in regularly scheduled installments (they’re also sometimes called installment loans). Medium and long-term loans usually accrue interest over time while short-term loans have flat fees.
  • Lines Of Credit: Lines of credit are a bit like credit cards. You’ll be approved for credit up to a set limit. You can draw on your account as often as you want as long as you stay below your limit, paying interest only on the outstanding balance.
  • SBA Loans: As is the case for other business types, there are Small Business Administration loans for restaurants. These loans are partially guaranteed by the SBA, allowing you to access better rates. Just bear in mind that the application process is usually more complicated and often slower.
  • Merchant Cash Advance: MCAs aren’t technically loans, but can serve as the financial product of last resort for businesses with bad credit but steady credit card revenue.
  • Equipment Leasing: If you’re looking to finance restaurant equipment, you also have the option to lease it, which you can read about in more detail in our restaurant equipment financing article.

Restaurant Loans For Start-Ups

If you’re looking for start-up restaurant financing, you’ll face a narrower band of options, but you aren’t completely out of luck. Conservative lenders may still consider approving a loan to start a restaurant if you have a good business plan and credit and are able to put some of your own money into the mix. Additionally, some alternative lenders offer loans specifically geared toward brand new businesses.

Restaurant Loan Providers

Not sure where to start looking for small business loans for restaurants? Here are some lenders to consider.

For Good Rates

Wells Fargo

Borrower Requirements:
• Credit score of 640 or higher
Read Our Review

 

As big banks go, Wells Fargo is one of the easier institutions for small businesses to work with. Due to their size and resources, they can offer a wide range of products for restaurants of any size. Their credit restrictions are higher than those of most of alternative lenders and they require you to show strong month-to-month revenue, but they’re more accessible than many of their conservative competitors.

Chase

Borrower Requirements:
• Excellent credit
Read Our Review

 

Chase has a reputation for offering some of the best business loan rates out there. The trick will be qualifying for them. Despite its size and prominence, Chase is very conservative about who they lend to. You’ll also need to have a branch near you as you’ll need to go to your local branch to apply.

StreetShares

Borrower Requirements:
• 1 year in business
• 620 credit score
Get Started With StreetShares

Read Our Review

 

If you don’t have a bank in your area with whom you’ve built a good relationship, you can still find good rates with online lenders. StreetShares is a bit more selective than many of their competitors, but they offer loans and lines of credits at reasonable rates with no collateral.

Fundation

fundation logo
Borrower Requirements:
• 1 year in business
• 660 credit score
• $100K/yr
Get Started With Fundation

Read Our Review

 

Fundation is another option for borrowers with good credit who would prefer (or have) to avoid dealing with a traditional bank. Fundation offers both installment loans and lines of credit with no collateral needed. Just be prepared for a slightly lengthier application process than you’ll typically experience with alternative lenders.

For Borrowers With Bad Credit

Lendio 

Borrower Requirements:
• 6 months in business
• 550 credit score
• $10K/month
Get Started With Lendio

Read Our Review

 

Lendio is an online lending platform that matches businesses with lending partners. This is a handy service for restaurant owners who don’t have a lot of time to compare loans on their own, or who have bad credit. Lendio’s pool of potential lenders is big enough that you’re more likely than not to find one willing to work with you, even if you haven’t been in business very long. If you’re looking for a loan to open a restaurant, however, you may have to look elsewhere.

OnDeck

Borrower Requirements:
• 12 months in business
• 500 credit or higher
• $100K/year
Get Started With OnDeck 

Read Our Review

OnDeck is one of the bigger names in alternative online lending and a solid choice for borrowers with poor credit but decent cash flow. Just be aware that their factor rates use a per month formula rather than a flat fee, which can make them a little bit difficult to compare to many of their competitors.

OnDeck offers installment loans and lines of credit.

LoanBuilder

Borrower Requirements:
• 9 months in business
• 550 credit or higher
• $42,000K/year
Get Started With LoanBuilder 

Read Our Review

LoanBuilder doesn’t offer as many products as some of the other lenders on the list, but they do give you the freedom to tweak the terms of a short-term loan to your liking. Combined with relatively low qualifications and integration with PayPal’s infrastructure, working with them should be pretty painless.

BlueVine

Borrower Requirements:
• 3 months in business
• 530 credit or higher
• $100,000K/year
Get Started With BlueVine 

Read Our Review

If your company is profitable, but you haven’t been in business long enough to build up a good credit score, BlueVine might be the lender for you. Rather than offering installment loans, BlueVine gives you the option of getting a line of credit or, if you do a lot of B2B business, invoice factoring. Just be aware that their lines of credit aren’t available in every state.

For Borrowers Starting Their Restaurant

Kiva

kiva logo
Borrower Requirements:
• A strong professional and social network
Read Our Review

 

If you’re coming up blank with ideas about how to get a loan to start a restaurant, Kiva is one possible solution. Kiva is a nonprofit microlender that operates worldwide. Rather than measure your income and credit, Kiva uses a process called “social underwriting” to measure your community standing and character. Best of all, the loans have zero interest.

So what’s the catch? Well, Kiva uses a type of crowdfunding to finance your loan, which means you’ll be waiting longer to get your funds than you would with most other lenders. You’ll also be limited to a maximum of $10,000, which may not cut it for your business plan. If you have some of your own money to put into your new business and just need to make up that last few thousand dollars, though, it’s worth a look.

Avant

avant logo
Borrower Requirements:
• Credit score of 600 or higher
Read Our Review

 

Another way around the time in business restrictions you’ll often encounter when seeking new restaurant business loans is to forget the “business” part and get a personal loan. While you won’t be able to borrow the large amounts that you can with a business loan, they can get you a modest ($1,000 – $35,000) amount of money with which to start a restaurant.

Note that you’ll still have to show a strong income relative to the amount of money you’re seeking. Additionally, Avant cannot currently lend to individuals in Colorado, Iowa, Vermont, or West Virginia.

Final Thoughts

If you didn’t find what you were looking in our examples above, don’t fret! We’ve barely scratched the surface of the resources restaurants can tap to find funding. If you don’t have much in the way of collateral, you can try to get an unsecured business loan.

If you’re looking to finance restaurant equipment, check out our resources on leasing and equipment loans. Good luck hunting for restaurant business loans! Do your research and you’re sure to find something that fits your needs.

The post How To Get Small Business Loans For Restaurants appeared first on Merchant Maverick.

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Best Cash Flow Loans For Small Businesses 2018

Best Cash Flow Loans For Small Businesses

You can’t run your business with an empty wallet. In life, money isn’t everything, but in business, cold hard cash is what makes the world go round. It’s what lets you continue your sales operations, pay your employees on time, manage your operating expenses, and turn a profit.

But what do you do when cash is running low or not coming in as quickly as you like? One option is to take out a business cash flow loan.

Not sure which type of cash flow loan is right for you, or where to find the best cash flow loan lender? We’ve got you covered. The article discusses the top seven cash flow loans for small businesses.

Let’s start by taking a look at this quick comparison chart of cash flow lenders.

StreetShares OnDeck LoanBuilder
Products Offered • Term loans
• Lines of credit
• Contract financing
• Term loans
• Lines of credit
• Short-term loans
Best For Small- to medium-sized businesses looking for a working capital loan or line of credit. Small- to medium-sized business looking for fast funding. Small businesses looking for a short-term loan with weekly repayments.
Required Time in Business 12 months 12 months 9 months
Required Revenue $25,000 /year $100,000 /year $42,000 /year
Required Credit Score 620 500 550
Read Review Read Review Read Review
Visit Site  Visit Site  Visit Site
Fundation BlueVine Fundbox
fora financial logo
Products Offered • Term loans
• Lines of credit/td>
• Lines of credit
• Invoice factoring
• Lines of credit
• Invoice financing
Best For Established businesses looking with good credit looking for installment loans or lines of credit. Small businesses looking for a line of credit or invoice factoring for consistent cash flow. Small businesses looking for a line of credit or invoice factoring for consistent cash flow.
Required Time in Business 12 months 6 months N/A
Required Revenue $100,000 /year $120,000 /year N/A
Required Credit Score 600 600 N/A
Read Review Read Review Read Review
Visit Site  Visit Site  Visit Site

There are more details about each lender below. Read on to learn which cash flow solution is right for you.

Best Types of Loans For Cash Flow

There are several types of loans that can be great options for increasing cash flow:

  • Installment loans
  • Short-term loans
  • Lines of credit
  • Invoicing financing

We’ll go over each type of loan so you can know exactly what to expect and choose which type fits your business’s needs best.

Installment Loans

Installment loans, also called term loans, are loans in which the borrower receives a lump sum of money that is paid back in regular installments. Interest is charged throughout the duration of the loan. Many times, you can save money by paying the loan back early (so long as your lender doesn’t charge a pre-payment penalty).

Installment loans are paid back in regular installments, usually on a monthly basis. Each payment goes to paying a portion of the principal (the borrowing amount) and the interest (a fee based on a percentage of your remaining principal). Most installments loans have term lengths between 1 and 25 years.

Installment loans can be used for multiple business needs, including short-term cash flow and long-term business growth plans. Common uses for installment loans include:

  • Working capital (or everyday expenses)
  • Inventory purchasing
  • Equipment
  • Business expansion
  • Business acquisition
  • Debt refinancing

Because of the longer term lengths, installment loans are considered higher risk than other types of loans, and young and unstable businesses might have trouble qualifying. These loans are best for established businesses that want a longer period of time to repay their debt.

Short-Term Loans

A short-term loan is a lump sum of money granted to a borrower and paid back in frequent, regular installments over a short period of time. Unlike an installment loan, a short-term loan does not have an interest rate; instead, this type of loan has a factor rate — a multiplier used to calculate a fixed fee that is added to your loan. The fixed fee is only calculated once and is repaid in along with the principal.

Short-term loans are paid back in regular fixed installments on a weekly, or even daily basis. For this reason, short-term loans are ideal for businesses with enough cash flow to afford these payments. Most short-term loans have term lengths between 3 and 18 months (with some up 24 or 36 months).

Short-term loans can be valuable for multiple types of business needs. Common uses for short-term loans include:

  • Working capital
  • Inventory purchasing
  • Equipment purchasing
  • Business expansion
  • Hiring or training new employees

Short-term loans are considered low risk and are generally known for low borrower requirements, fast funding, and no specific collateral. This type of loan can be ideal for businesses in need of extra cash who have the existing cash flow to make frequent repayments.

Lines of Credit

Unlike short-term loans and installment loans, lines of credit aren’t lump-sums of money handed to you all at once by a lender. Instead, when you are approved for a line of credit, a lender gives you access to a credit line with a certain amount of money that you can draw from at any time. 

Any draws made on a line of credit are paid in regular installments. Most lines of credit are revolving — as soon as you pay off the amount you used, it’ll be added back into the total available on your credit line. This means you can keep using the same funds again and again without reapplying for a loan.

Lines of credit are great for short-term, everyday business need, making them a great cash flow solution. Lines of credit also are a great cash cushion for unexpected expenses and emergencies. Common uses of a line of credit include:

  • Working capital
  • Payroll
  • Overhead costs
  • Seasonal expenses
  • Inventory purchasing
  • Unexpected expenses

Lines of credit are fairly easy to qualify for because they are offered by such a wide variety of lenders. They are ideal for nearly any type of business in need of a cash flow solution or looking for peace of mind regarding unexpected expenses. The only downside is that if you use up all of your credit line at once, you may not have access to the cash you need until you pay some of it back.

Invoice Factoring

Invoice factoring is a cash flow solution in which you sell your unpaid invoices to an invoice factor in exchange for immediate cash. The tradeoff is that the invoice factor keeps a portion of the cash from the invoice on reserve until your customer pays. Once paid, the factor will grant you the rest of the reserve, minus a small fee.

Contract lengths, and the invoices eligible for factoring, vary by lender.

Invoice factoring allows businesses to receive cash faster than they normally would. The money received from invoice factors can be used to meet various business needs:

  • Working capital
  • Payroll
  • Inventory purchasing

Invoice factoring is a great solution for businesses that suffer from slow paying customers and are in need of immediate cash. You do lose a small portion of your invoice sale to the factor’s fees, but this can be more than worth the cost for many businesses that rely heavily on invoices.

The Best Cash Flow Loan Lenders

StreetShares

Best For…

Small- to medium-sized businesses looking for a working capital loan or line of credit.

Products Offered

  • Installment loans (or term loans)
  • Lines of credit
  • Contract financing

Founded in 2013, StreetShares is a peer-to-peer (P2P) lender created by veterans for veterans, although now any eligible merchant can access funding. This lender offers installment loans, lines of credit, and contract financing (similar to invoice factoring). StreetShares boasts no prepayment penalties, an easy application process, and excellent customer service.

Borrower requirements:
• Must be in business at least 12 months with a revenue of $25,000 per year (sometimes StreetShares will make exceptions for high-earning businesses at least 6 months old).
• Must have a personal credit score of 620 or above.
Visit the StreetShares website
Read our StreetShares review

Here are the rates for StreetShares installment loans and lines of credit:

Borrowing amount: Up to $100K
Term length: 3 – 36 months
Interest rate: About 6% – 14%
Closing fee: 3.95% or 4.95% (installment loans)
1.5% draw fee (lines of credit)
APR range: 7% –  39.99%

These are the rates and fees for StreetShares’ contract financing:

Credit facility size: Max $500K per invoice
Advance rate: Up to 90%
Discount rate: Varies
Max overdue account: 180 days
Additional fees: None
Contract length: N/A
Monthly minimums/maximums: None
Factor all invoices: No
Recourse or non-recourse: Non-recourse
Notification or non-notification: Notification

How To Apply For A StreetShares Loan

To apply for funding from StreetShares, you’ll need to fill out an initial questionnaire. If approved, you’ll be asked to provide additional information, and then StreetShares will come back with an offer (or offers). The whole process takes between two and seven days on average.

Takeaway

StretShares offers competitive installment loans, lines of credit, and contract financing to eligible small and medium businesses. If you have fair credit and a need for additional cash flow, StreetShares is a great business financing option.

OnDeck

Best For…

Small- to medium-sized business looking for fast funding.

Products Offered

  • Short-term loans
  • Lines of credit

One of the first online lenders, OnDeck offers fast approval for lines of credit and short-term business loans. Although OnDeck’s fees can get a little pricey, the service is a convenient and quick way for businesses to access cash. Eligible OnDeck applicants usually receive funding 24 to 48 hours after their initial application.

Borrower requirements:
• Must be in business at least 12 months with a revenue of $100,000 per year.
• Must have a personal credit score of 500 or above.
• Must not be in one of OnDeck’s restricted industries.
Visit the OnDeck website
Read our OnDeck review

Here’s what to expect from an OnDeck short-term loan:

Borrowing amount: $5K – $500K
Term length: 3 – 36 months
Fixed fee: x1.003 – x1.04 per month
Origination fee: 0% – 4%
APR: Approx. 7% – 98%
Collateral: UCC-1 blanket lien, personal guarantee

And here’s what to expect from an OnDeck line of credit:

Borrowing amount: $15K – $100K
Draw term length: 6 months
Draw fee: None
Maintenance fee: $20/month
APR range: 13.99% – 39.9%
Collateral: Personal guarantee

How To Apply For An OnDeck Loan

To apply for OnDeck financing, fill out an application online and OnDeck will let you know if you’re approved (usually in less than 24 hours). You may then need to provide additional documentation before receiving your funding. Typically, the loan can be approved and funded within one to two days.

Takeaway

If you’re looking for quick cash to cover working capital expenses or expand your business, OnDeck could be a great option. While the fees may get a bit spendy, the convenient, quick approval and low borrower requirements are more than worth it for some small business owners.

LoanBuilder

Best For…

Small businesses looking for a short-term loan with weekly repayments.

Products Offered

  • Short-term loans

Acquired by PayPal in 2017, LoanBuilder is a lending service offering short-term business loans to both PayPal users and non-PayPal users alike. LoanBuilder offers low borrower requirements and fairly reasonable rate and fees.

Borrowing amount: $5K – $500K
Term length: 13 – 52 weeks
Flat fee: 2.9% – 18.72%
Origination fee:  N/A
Effective APR: Learn more
Collateral: UCC-1 blanket lien

How To Apply For A LoanBuilder Loan

LoanBuilder allows potential borrowers to investigate their potential loan before applying. You simply enter some basic contact information and use their tool to check your eligibility, and then you can finish your application online.

Takeaway

With low borrower requirements and competitive rates, LoanBuilder can be a great option for small businesses looking for a short-term loan. Unlike some short-term loans, LoanBuilder offers weekly repayments instead of daily repayments which may make this loan more manageable.

Fundation

Best For…

Established businesses looking with good credit looking for installment loans or lines of credit.

Products Offered

  • Installment loans
  • Lines of credit

Founded in 2011, Fundation is an online lender that offers competitive installment loans and lines of credit without the long, complicated process of applying for a bank loan. Fundation also offers strong customer support and has very few negative complaints.

fundation logo
Borrower requirements:
• Must be in business at least 12 months and make at least $100,000 annually.
• Must have a personal credit score of 600 or above.
• Must have at least three full-time employees (yourself included).
Visit the Fundation website
Read our Fundation review

These are the terms and fees for Fundation’s installment loans:

Borrowing amount: $20K – $500K
Term length: 1 – 4 years
Origination fee: Up to 5%
APR: 7.99% – 29.99%
Collateral:  Personal guarantee, UCC-1 blanket lien

Here’s what to expect from Fundation’s lines of credit:

Borrowing amount: $20K – $100K
Term length: 18 months
Additional fees: $500 closing fee
2% draw fee
APR: 7.99% – 29.99%
Collateral:  Personal guarantee, UCC-1 blanket lien

How To Apply For A Fundation Loan

The Fundation application process includes filling out an online application, documenting your business’s ID and finances, and speaking with a representative directly to see if you’re a good fit for a Fundation loan. After speaking to a rep, your application will go through to underwriting and you may hear back in as early as 24 hours.

Takeaway

Fundation is a great option for established businesses looking for rates and fees as competitive as bank loans, without the long, complicated application process. Because of the more stringent borrower requirements, Fundation is not ideal for startups; but, if you do qualify, this financing option is well worth looking into.

BlueVine

Best For…

Small businesses looking for a line of credit or invoice factoring for consistent cash flow.

Products Offered

  • Lines of credit
  • Invoice factoring

Founded in 2013 on the idea that small business financing should be easy, BlueVine offers lines of credit and invoice factoring for small businesses. The company is known for revolutionizing the invoice factoring world and helping business owners get quick cash for unpaid invoices. With relaxed borrower requirements, BlueVine may be ideal for young businesses.

bluevine logo
Invoice factoring borrower requirements:
• Must be in business at least 3 months with a revenue of $100,000 per year.
• Must have a personal credit score of 530 or above.
• Business must be B2B and invoice customers.
Line of credit borrower requirements:
• Must be in business at least 6 months with a revenue of $120,000 per year.
• Must have a personal credit score of 600 or above.
• Lines of credit are not available in all states. See full review for details.
Visit the BlueVine website
Read our BlueVine review

Here are the rates for BlueVine’s lines of credit:

Credit facility size: $6K – $5M
Term length: 6 or 12 months
Interest rate: 0.3% – 1.5% per week
Draw fee: 1.6% – 2.5% per draw
APR: 15% – 78%
Personal guarantee: Yes

Here are the rates for BlueVine’s invoice factoring:

Credit facility size: $20K – $5M
Advance rate: 85% – 95%
Discount rate: 0.3% – 1% per week
Max overdue account: 13 weeks (91 days)
Additional fees: $15 wire transfer fee (no charge for ACH transfers)
Contract length: N/A
Monthly minimums: No
Factor all invoices: No
Recourse or non-recourse: Recourse
Notification or non-notification: Both (see below)

How To Apply For A BlueVine Loan

To apply for BlueVine funding, you’ll need to answer a few basic questions about yourself and your business. You’ll then speak with a representative who will ask several additional questions. Typically, you’ll hear back in about 24 hours.

Takeaway

With relaxed borrower requirements and an easy application process, BlueVine can be a great choice for small businesses looking to increase their cash flow with invoice factoring or a line of credit. Be sure to check that BlueVine lines of credit are supported in your specific state before applying.

Fundbox

Best For…

Microbusinesses looking for invoice financing or a line of credit to increase cash flow.

Products Offered

  • Lines of credit
  • Invoice financing

Similar to BlueVine, Fundbox is an invoice financing solution created to help small businesses have more consistent cash flow. Since its inception in 2013, Fundbox now offers lines of credit as well. Fundbox offers relaxed borrower qualifications, making it ideal for less established businesses, and there are no additional fees.

Borrower requirements:
• No revenue or time in business requirements, but must use compatible accounting or invoicing software for at least 3 months, or a compatible business bank account for at least 6 months.
• No specific credit score requirements.
Visit the Fundbox website
Read our Fundbox review

Here are the rates for Fundbox’s invoicing financing (called Fundbox Credit):

Credit facility size: Up to $100K
Advance rate: 100%
Advance fee: 0.4% – 0.7% per week
Term length: 12 or 24 weeks
Additional fees: None
Contract length: N/A
Monthly minimums: No
Factor all invoices: No
Recourse or non-recourse: Recourse
Notification or non-notification: Non-notification

Here are the rates for Fundbox’s lines of credit (called Direct Draw):

Borrowing Amount: $1K – $100K
Term Length: 12 weeks
Borrowing Fee: 0.5% – 0.7% per week
Draw Fee: None
Effective APR: 12% – 54%

How To Apply For A Fundbox Loan

Fundbox’s application is a bit unique. To apply, you simply create an account and hook it up to your existing accounting software or bank account. Fundbox then uses the information to determine whether you qualify for a loan. This process is extremely quick and most applicants will receive a funding decision in minutes.

Takeaway

Fundbox can be a great financing solution for small businesses in need of low borrower qualifications and quick cash. Fundbox’s borrowing amounts may be too small and the rates too steep for larger businesses, but for less established businesses that don’t qualify elsewhere, Fundbox can be a cash flow solution.

Which Cash Flow Loan Is Right For My Business?

With seven great options, it can be hard to know which is right for your business. When choosing a cash flow loan, ask yourself these questions:

  • What is the purpose of the loan?
  • Which type of loan is best for my business needs?
  • What’s my credit score and monthly/yearly revenue?
  • How much do I need to borrow? (And especially, how much can I afford to borrow?)
  • How quickly do I need the funding?

All of these factors will play a role in deciding which lender you should go after. If you need additional help or want to see even more financing options, check out our comprehensive small business loan reviews.

The post Best Cash Flow Loans For Small Businesses 2018 appeared first on Merchant Maverick.

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10 Strategies To Improve Cash Flow

10 Strategies To Increase Cash Flow

If you’re reading this blog, then you already know how important cash flow is. Cash flow is the mainstay of your business. Positive cash flow means you can successfully run and grow your business, and negative cash flow — well, that’s bad news.

But what do you do when you have negative cash flow? How do you increase your positive cash flow and get your business where it needs to be?

Cash flow is affected not just by bringing in more cash inflows, but also by limiting your cash outflows. This means you have to manage your expenses just as much as your sales. Read on for ten practical tips to help you improve your cash flow and get your business on the right track.

1. Send Invoices Right Away

Sales and invoices are the lifeblood of a small business. You can’t get paid if you don’t send invoices. Simple as that.

Make sure you stay on top of invoicing your customers. The quicker you send invoices out, the faster the cash comes in. If your current invoicing process is tedious, consider switching to a cloud-based accounting software with attractive, easy to create invoices. Software like QuickBooks Online and Zoho Books both offer great invoicing capabilities which can help you speed up your invoicing process and increase your cash flow.

Our comprehensive accounting software reviews cover QuickBooks products, Xero, Freshbooks, Sage, and more of the top cloud-based and locally-installed accounting solutions on the market today. If you want a quick peek at the top contenders, check out our accounting software comparison chart.

Using an old version of QuickBooks Pro? Save $100 when you upgrade to QuickBooks Desktop 2018.

Purchase QuickBooks Desktop Pro 2018 Now

2. Get Customers To Pay Invoices On Time

Another key to increasing your cash flow is getting your customer to pay their invoices on time. We know this is easier said than done, but there are plenty of practical strategies to increase the likelihood of getting paid faster. Here are some of our top invoicing tips:

Follow Up With Invoice Reminders

Make sure you remind your customers when their invoices are due. Send email reminders a few days before the invoice is due, the day the invoice is due, and a few days after. If they still haven’t paid, give them a call and continue sending reminders. Many accounting programs have built-in invoice reminders that you can automatically send to late paying customers.

Give Your Customers Incentives

Consider offering a discount to customers who pay their invoices before a certain time. If your invoice terms are Net 30 (due 30 days after the invoice is sent), but you really want your customers to pay their invoices in the first week they receive the invoice, offer a small discount. Customers looking for a deal will be more likely to pay their invoices faster, which means you get cash faster.

Charge A Late Payment Penalty

Another key to successful invoicing is having a strong invoicing policy. Choose a consistent time when invoices are due (ex. due upon receipt, Net-15, Net-30, etc) and stick to it. Have a late payment penalty in place for customers who exceed the due date. Not only will this help increase your chances of getting your money, it will also set you apart as a professional.

When it comes to late payment penalties, be upfront about the penalty, when it will be charged, and how much will be charged. You can often include this in your terms and conditions section on your invoice. Do some research on what a normal late penalty policy looks like for your industry before implementing.

Consider Invoice Factoring

If the above strategies don’t work or you need cash right away, another option is invoice factoring. Invoicing factoring is the process of selling your unpaid invoices to a company in exchange for immediate cash. The factoring company takes a small cut of the money you earn, but the payoff is that you aren’t stuck waiting on customers.

Invoice factoring can be a great cash flow solution, as can invoice financing. Check out one of our favorite invoice factors, BlueVine, to learn more. Or take a look at Fundbox, an invoice financer, for an alternative solution.

3. Increase Prices

If you are hurting for cash flow, it may be time to consider increasing the prices for your products or services. Ask yourself:

  • What are my competitors charging?
  • Have the prices for equipment or inventory increased?
  • How much manpower does my inventory assembly or services require?
  • Do my prices outweigh the time put into my creating my products?
  • Are my prices too low? Do my products come off as cheap or valuable?

You want to strike a balance between keeping your prices competitive and fairly compensating the hard work you and your employees do. At the end of the day, you want to make sales, but you also want to make a profit. If your prices are too low, you may be selling yourself short. In some cases, lower prices can also make your company seem less qualified.

4. Expand Sales Market

Another solution to increasing positive cash flow is to brainstorm new sources of income. Get the dream team together, sit down with some coffee, and consider new ways to expand your sales market. Here are a few new sales possibilities to get the ideas rolling.

Add New Services Or Products

Think about the current items or services you offer and consider if there are other items or services you think would be a good addition to your business. Think outside of the box and consider alternate ways to earn income as well.

Maybe your coffee shop starts offering homemade lemonade for the summer; maybe your event planning service adds a cleaning service to maximize on business; maybe your office rents out its large outdoor space for parties and events on the weekends when it’s not in use. Whatever it is, get creative about new ways your business can generate income, which will in turn and increase cash flow.

Create A New Marketing Strategy

Maybe the products you offer are spot on, but your marketing could be expanded. Think of new ways to get the word out about your business. Consider if there are any other groups of people that could benefit from what your business offers. Bringing in more customers is a great way to bring in more cash flow.

Encourage Customers To Buy More

Another great way of improving cash flow is getting your existing customers to spend more. There are two great ways to do this:

  • Bundle Items: Sell similar items together to encourage increased spending.
  • Advertise Related Products: If you use an eCommerce platform, advertise additional products that the buyer “may be interested in” or that “others also purchased.”

Both of these can be great ways to expand your existing sales (rather than having to expand a whole sales market). If you want to start advertising related products or selling your products online, check out our top eCommerce recommendations.

Don’t Forget Your Loyal Customers

Another great way to expand your market is by letting happy customers do it for you. Encourage loyal customers by offering discounts to loyal customers or implementing rewards programs, like stamp cards, for multiple purchases. Also, consider implementing a referral program. This way you can encourage your loyal customers to grow your business for you through word of mouth.

5. Reevaluate Operating Expenses

Managing cash flow isn’t just about getting more cash to come into your business. It’s also important to reduce the cash going out of your business as much as possible. Here are five tips for reducing your business’s operating expenses, so you have more cash to spare.

Cut Out Unnecessary Expenses

Take a careful look at your cash flow statement and analyze your company’s business expenses. Ask yourself these two questions:

  • Are these expenses necessary?
  • If they are necessary, is there a cheaper alternative?

Carefully consider your current expenses. Cut out any that are unnecessary and try to minimize the necessary expenses as much as you can. It may seem difficult to do, but you (and your wallet) will feel much better knowing that you’re managing your cash flow and expenses effectively.

Streamline Your Business Processes

Another important aspect of managing your cash flow is making sure your business is running as efficiently as possible. Focus on cutting time, not just costs. Analyze all of your current business processes and judge how efficient the current process is, and if there’s any way to speed up that process.

Maybe that means implementing accounting software to send invoices faster or rethinking your employees’ inventory assembly process. By using time efficiently, you can get more done, spend less on wages, and avoid excessive overtime pay (which can put a huge dent in your business’s cash)

Purchase More Efficient Equipment

One way to increase your company’s speed and efficiency is to purchase better, updated technology and equipment. While it may cost a bit to purchase the equipment initially, you will save time which cuts back on wage expenses. This may also lead to increased production or the ability to take on extra projects, which leads to more incoming cash.

Looking for equipment financing? Check out our comparison of the top equipment financers for small business.

Ask Suppliers For Bulk Inventory Rates

Some vendors, especially those with whom you have a good relationship, may offer discounts for buying inventory in bulk. These can definitely be worth taking advantage of, so don’t be afraid to ask your suppliers if they have any deals.

Consider Leasing Equipment

If you don’t have the cash to flat out buy equipment or you don’t qualify for a working capital loan, it might be worth considering leasing equipment. You lose the advantage of having the equipment as a fixed asset for your business, but you gain lower monthly payments, which may be what you need to keep your cash flow in check.

6. Liquidate Old Inventory

Inventory is one of the largest business expenses you might encounter. You need inventory to make a profit, but you want to make sure the inventory you’re buying is actually selling. Carefully consider which products sell well and which you have a hard time turning over. Take a look at your sales patterns to see when your busy and non-busy sales times are and order inventory accordingly.

If you have any old inventory that you’re having a hard time getting rid of, consider liquidating the items. Any money coming in is better than no money.

7. Pay Vendors At The Right Time

Be strategic about when you pay your vendors. If your vendor offers a discount for paying early, be sure to pay in the time required time to save some money. If the vendor doesn’t offer a discount, pay when is most favorable for your business.

Say your bill is due on the June 1st. Your cash flow statement records show that May is a slow month for your business, but June has a history of higher sales. Pay your bill the last day it’s due so that you can report a positive cash flow for May.

If you need even more time to pay off bills, you can also consider paying with a business credit card. This way you can pay off the expenses over a period of time rather than all at once. Take a look at our business credit card reviews to find the right card for you.

8. Open A Business Savings Account

If you don’t have one already, open a business savings account where you can earn money on interest. This is a simple way to generate a bit of extra cash and it’s a smart way to ensure you always have a cash flow cushion for your business.

9. Consider A Cash-Back Business Credit Card

Using a cash back business credit card can be a strategic way to earn cash on your expenses. As long as you use the card wisely and can afford to make regular (if not full) payments each month, a cash back credit card is easy money. There are several great cash back rewards cards out there. Here are some of the best cash back business cards for small businesses.

10. Take Out A Small Business Loan

Another option to increase cash flow is to take out a short-term loan or line of credit. With a short-term loan, a lender gives you a lump sum of money that is paid back in regular installments over a short period of time. With a line of credit, a lender grants you a max borrowing amount that you draw from any time you need cash; payments are made only on the money used.

While the prospect of owing money may make you squeamish, there are several great reasons to take out a cash flow loan:

  • To expand your business
  • Purchase inventory
  • Take on a new, profitable project
  • Purchase new equipment
  • Unexpected expenses
  • To cover off-season slumps

If a loan sounds like a good cash flow solution for your business, check out our top small business lenders to find the right loan for you.

All of these tips can help you manage and increase your cash flow. Whether you decide to focus on increasing your sales, decreasing your expenses, gaining capital — or a mix of them all — you’re well on your way to increasing your cash flow and running a more successful business.

The post 10 Strategies To Improve Cash Flow appeared first on Merchant Maverick.

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How To Calculate And Analyze Business Cash Flow

How To Calculate And Analyze Business Cash Flow

Cash flow is one of the most important aspects of running a successful business. But how do you calculate cash flow? And once your cash flow is calculated, what does that tell you about your business?

We’re glad you asked!

Cash flow is the money that comes in and out of your business, so it would be easy to assume that you simply subtract the cash outflows from the cash inflows when calculating cash flow.

While this is the process, in theory, the application is much more complicated. There are several different ways of calculating cash flow, and it can be hard to know which way is best. In this post, we’ll teach you the most common way to calculate cash flow: running a cash flow statement.

We’ll also teach you what a healthy cash flow statement should look like and how to analyze your cash flow using the free cash flow ratio and a cash flow forecast. With these three cash flow calculations in tow, you’ll understand your business’s cash flow in no time.

Let’s get started.

What Is A Cash Flow Statement?

A cash flow statement, or statement of cash flows, is a report that measures the cash coming in and out of your business during a specific period of time. Along with the income statement and balance sheet, the statement of cash flows is one of the most important financial statements in accounting. The cash flow statement shows four different cash flow figures:

  • Operating cash flow
  • Cash flow of investment activities
  • Cash flow of financial activities
  • Net cash flow

You can create a cash flow statement by using Excel or Google Docs, but the easiest way to generate a statement of cash flows is by using accounting software. Most accounting software will do all of the hard work for you. Simply make sure your income and expenses are up-to-date, tell the software to run a cash flow statement, and voila! You have yourself a cash flow statement.

How To Calculate And Analyze Business Cash Flow

You’ll see that the cash flow statement is divided into three sections: cash flow of operation activities, cash flow of investment activities, and cash flow of financial activities. We’ll walk you through each section so you can understand exactly how the cash flow statement works and what it’s telling you about your business.

Still using Excel to run your accounting processes? It may be time to upgrade. Our comprehensive accounting software reviews cover QuickBooks products, Xero, Freshbooks, Sage, and more of the top cloud-based and locally-installed accounting solutions on the market today. If you want a quick peek at the top contenders, check out our accounting software comparison chart.

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Cash Flow Of Operation Activities

Cash flow of operations, or operating cash flow, shows the total cash gained or spent on business operations during a given period. Operating cash flow is used as a key indicator of how efficient and healthy your business is. It is one of the most common (and important) cash flow calculations.

Here are some examples of the operating cash inflows and outflows you can expect to see in the cash flow of operating activities on your statement of cash flows:

  • Inventory purchases
  • Wages
  • Cash received from sales or services
  • Interest earned
  • Rent payments
  • Other operating expenses

Your total operating cash flow is calculated by subtracting the cash outflows directly related to your business operations from the cash inflows directly gained from your business operations.

When you run a statement of cash flows, you’ll see your total operating cash flow expressed under “net cash flow for operating activities.” This amount shows what you made (or lost) on basic business operations. You can use the cash flow of operating activities to:

  • See how much cash you’ve gained from your business operations in a given period
  • Understand which business expenses you’re spending cash on
  • Analyze where to cut back on operating business expenses

Cash Flow of Investment Activities

The cash flow of investment activities shows how much cash you spent on long-term investments and made on long-term investments.

For most businesses, this section of the cash flow statement shows cash spent on purchasing new fixed assets and cash gained from selling fixed assets. (Fixed assets are valuable items owned by your business that have a long-term use.)

Examples of investments that you may see on the cash flow of investment activities section of the cash flow statement include:

  • Purchasing or selling property
  • Purchasing or selling buildings
  • Purchasing or selling equipment
  • Purchasing or selling company vehicles
  • Capital expenditures (CapEx)

Basically, cash flow of investment is affected by any change to your long-term assets — or property, plant, or equipment (PPE) — and any expenses paid to manage current assets (which is referred to as capital expenditures). You total cash flow of investment activities is calculated by subtracting your investment cash outflows from your investment cash inflows.

You can use the cash flow of investment activities to analyze the state of your company’s fixed assets. Lenders and potential investors also use this cash flow ratio to see if your company is growing and investing in your business’s future.

Cash Flow Of Financial Activities

The cash flow of financial activities shows the cash spent and received from financing — or raising capital. Cash flow of financial activities is used to see how much cash you’ve received from loans or investors and how much cash you’ve spent on paying back debts and shareholders.

Here are some examples of the financing cash inflows and outflows you can expect to see in the cash flow of financing activities on your statement of cash flows:

  • Cash received from loans
  • Loan payments
  • Cash received from investors
  • Dividends paid to shareholders
  • Purchasing company stock

Your total cash flow of financing activities is calculated by subtracting the financing cash outflows directly related to financing (like paying past debt and shareholders) from the cash inflows raised from financing (like new loans and cash from investors).

The cash flow of financial activities is important for analyzing whether your business has the cash to pay off its debt or to take on new debt. This is a key cash flow formula for potential lenders and investors as well. Lenders want to see that your business has the means to make payments on your a new loan, and potential investors want to see that your company has the cash to pay back shareholders.

What Does A Good Cash Flow Statement Look Like?

So now that you know what a cash flow statement is and how to run one, how do you know what your cash flow statement means? What does your cash flow statement say about your business’s financial health? What is a good cash flow and when should you be worried about your cash flow?

Don’t worry, your cash flow statement has answers to all of these questions. We already briefly mentioned how each type of cash flow can be used to analyze the health of your business. In this section, we’ll recap each section of the cash flow statement and give you a clearer idea of what a successful business’s cash flow looks like.

1. A Good Net Cash Flow

Your net cash flow appears at the bottom of your statement of cash flows and is a total of your cash flow of operating activities, your cash flow of investment activities, and your cash flow of financial activities. This total will either appear as a net increase in cash flow or a net decrease in cash flow. Ideally, you want a net increase in cash flow, which shows that your company brought in more money than it spent.

While you want a positive cash flow, you may not want your cash flow to be too positive. Seem counterintuitive? Here’s why.

If you have an incredibly high cash flow, that is extra money that you can be (and should be) investing back into your business. It’s important to strike the balance of maintaining a positive cash flow and using that positive cash flow to ensure that your business grows and makes even more money in the future.

2. A Good Operating Cash Flow

Your operating cash flow shows how much money your company is making or losing on everyday business operations. Business operations are the bread and butter of your business, so it makes sense that you want your operating cash flow to be a high, positive number. You always want to see this number increasing over time.

If your operations appear as a net loss instead of a net increase, you may want to reevaluate your business practices. Increase prices, don’t reorder unpopular inventory, streamline processes to save time and money on payroll, incentivize customers to pay their invoices in a timely manner — do whatever it takes to spend less and bring in more so that your business can flourish.

That being said, it’s important to not only know what your operating cash flow is but to analyze why your operating cash flow is negative or positive. There may be some months that you have a negative operating cash flow, and that may not be a bad thing.

Let’s say you’re a seasonal business and you spend a large sum on purchasing inventory to prepare for the holiday season. Because of this, your September cash flow statement shows a net loss on operating cash flow. However, during October, November, and December, you bring in tons of cash selling the inventory you purchased. You wouldn’t have been able to make strong sales or have such a positive cash flow during the holidays without that extra inventory.

In this case, one month of negative cash flow led to three months of incredibly positive cash flow, which was more than worth it. You only have to start worrying if your operating cash flow is negative again and again.

3. A Good Cash Flow Of Investing Activities

Your cash flow of investing activities shows how much money you’ve spent on purchasing and maintain fixed assets and made on selling assets.

Typically, most growing business will have a net loss on cash flow of investing activities. While that may sound ominous, it really means that you are actively investing in new fixed assets to expand your business and replacing old equipment to help your business run more efficiently. This is a good thing.

4. A Good Cash Flow Of Financing Activities

Your cash flow of financing activities shows the cash used to pay off your business’s existing debts and any new financing or loans received.

Generally, you want to see a negative net cash flow from financing activities. This means that you are paying off existing debt and paying dividends to shareholders.

That being said, it is okay to have a net gain in cash flow of financing activities at times. A positive net cash flow of financial activities means your business has gained cash from investors or secured a new business loan. While some business owners may assume that debt is always a bad thing, there are several good reasons for applying for a business loan:

  • To purchase new equipment that will benefit your business
  • To expand your business
  • Purchasing inventory
  • Hiring and training employees

If you can afford to take on a loan, the extra funds may be just what your business needs to succeed. Use the cash flow of financing activities to analyze your business’s financial state and determine what is healthiest for your future.

How To Use The Free Cash Flow Ratio

The free cash flow ratio is one of the most important ratios a business owner should know. While the cash flow statement shows your overall net cash flow, the free cash flow ratio shows the amount of cash that is actually available for your business to use. This ratio is incredibly important for analyzing your business’s financial health.

Free cash flow shows you the amount of the cash left over after paying for your business’s operating expenses (the expenses required to run your business) and capital expenditures (the expenses spent on purchasing and maintaining your fixed assets). You can calculate your free cash flow by using this formula:

Free Cash Flow = Operating Cash Flow – Capital Expenditures

Simply take the net operating cash flow from your cash flow statement and subtract the total capital expenditures for your business.

By using this formula, you can see exactly how much free cash flow your company has to work with. Free cash flow is particularly important when considering taking on a new working capital loan to expand your business. Knowing exactly how much money you have in free cash, on average, can help you determine the loan payments you can afford.

How To Create A Cash Flow Forecast

Another important step in analyzing your business’s cash flow — and, in turn, your business’s health — is to create a cash flow forecast.

A cash flow forecast, also known as a cash flow projection, is an estimation of your future cash inflows and cash outflows over a specific period of time (usually a year). This estimation should be based on past cash flow data or educated guesses on the cash sales and expenses you expect to face in the upcoming year. This helps your cash flow projection to be as accurate as possible.

While cash flow forecasts are beneficial for any business wanting to get a handle on their finances, they are particularly helpful for seasonal businesses. A cash flow forecast can help you pinpoint the months during which cash will be tight and the months during which cash will be plentiful. This way, you can plan to save enough cash to cover expenses during the slow months.

In this way, a cash flow forecast gives you valuable business insight. Additionally, comparing your cash flow projection with your cash flow actuals at the end of the year is an important business practice for seeing if you met your business goals, where your company is excelling, and where it could still improve.

Many accounting software programs have a cash flow forecast report built-in. However, if your accounting software doesn’t have a cash flow projection, you can create one manually by estimating your:

  • Cash sales for each month
  • Expenses for each month
  • Fixed asset investments
  • Debt payments
  • Additional capital

Be as realistic as you can and include any sales or expenses that directly affect your business’s cash. If you don’t want to calculate this all by hand, there are several free cash flow forecast templates available online as well.

What Now?

Cash flow is one of the most important aspects of business. Without a strong, positive cash flow, you won’t be able to stay in business long.

Now that you know how to run a cash flow statement, use the free cash flow ratio, and create a cash flow statement, you can confidently understand your company’s cash flow. You can use all three tools to analyze your business’s cash flow. These tools will let you determine where your business is excelling and where it could be improved, help you figure out if you can afford a loan, and prepare for the lean cash flow months.

After analyzing your business’s finances, you may determine that you need a working capital loan or a line of credit to help you maintain positive cash flow. Read through our detailed small business loan reviews or view our business loan comparison chart to find a lender that works for you. If your business depends on invoices, invoice financing might be more your speed. With invoice financing, it’s possible to get cash for your invoices right away. Learn more about invoice financing in our Merchant’s Guide To Invoice Financing guide and/or check out two of our favorites: BlueVine and Fundbox.

For more information on accounting concepts and strategies, our accounting and bookkeeping blog is a good place to start. We cover everything from double-entry accounting to small business taxes. We also guide you through how to choose small business accounting software. What’s more, our comprehensive accounting software reviews cover QuickBooks products, Xero, Freshbooks, Sage, and more of the top cloud-based and locally-installed accounting solutions on the market today. For a bird’s eye view of the top contenders, check out our accounting software comparison chart.

The post How To Calculate And Analyze Business Cash Flow appeared first on Merchant Maverick.

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The Best Free Credit Score Services

free credit score monitoring service

Having a good credit score is integral to getting goods and services at a reasonable rate. Most creditors will look pull up at least one of your scores, whether you are looking for a loan, housing, a credit card, or some other product or service.

It’s important to have at least a rough idea of your current credit score, whether that’s so you’re prepared for what creditors are going to see when they pull up your history, because you are trying to improve your score, or something else.

There are a number of different services that can help you get a good overall picture of your credit health. But which ones are the best? And what do their scores really tell you? Below, we explain exactly what credit scores are and list some of our favorite places to access your scores for free.

Read on for the details!

What Are Credit Scores?

In short, credit scores are numbers that represent your creditworthiness. Lenders, credit card issuers, and other services that expect payment, like utility companies, cell phone providers, and more, look at your credit score to see how creditworthy you’ve been in the past, which indicates how likely you are to pay on-time in the future. Personal credit scores range anywhere from 300 to 850; the higher the better.

Each creditor has their own ideas about what’s considered “good” credit, but typically if you have a score above 600, you won’t have a terribly difficult time finding creditors willing to work with you. However, the higher your credit, the more services you’ll qualify for, and the better rates you’ll receive.

Contrary to popular belief, you don’t have just one credit score; in fact, you have many. Credit scores are derived from your credit report — a history of your past debts, payments, and other information gathered by credit reporting agencies. The big three credit reporting agencies are Experian, Equifax, and TransUnion. While all three agencies gather similar information about you, they might not all have the same information.

A scoring algorithm, usually either VantageScore or FICO, is applied to your credit report to come up with your score. As such, consumers have many different credit scores, depending on the scoring system and the credit report your information was derived from.

VantageScore VS FICO

Credit scores are derived from your credit report using a scoring model, either VantageScore or FICO. Both have scales of 300 to 850, but they might return different scores because they place importance on different factors.

Most free credit score services get their data from VantageScore. However, many creditors will look at your FICO score. If a potential lender pulls your TransUnion FICO score, for example, they will get a different number than what you’re seeing from your free credit score service.

That said, the difference in scores doesn’t tend to be large; if you have a high FICO score, you will also have a high score from VantageScore. Conversely, if you have a poor (or inaccurate) marks on your report, they will be reflected by both VantageScore and FICO as a lower score. For general credit score monitoring, either VantageScore or FICO will suit most consumer’s purposes.

If you need to know your FICO score, for whatever reason, you have a few different options:

  • Some of your FICO scores can be accessed for free via Discover Credit Scorecard (see below). This score is derived from your Experian data.
  • Scores derived from all three credit reporting agencies can be purchased directly from FICO via myFICO. Currently, one-time access to scores from all three agencies can be purchased for $59.85 ($19.95 for scores from one agency).
  • Some credit card issuers, or other places that extend credit, will provide your scores if you are a customer.

Be aware, however, that even if you check your FICO score from the same agency that your lender does, you still might be looking at a different score. FICO offers a number of different credit scores, some of which are not available to consumers.

The Best Free Credit Score Services

The following are our favorite credit score services. These services derive scores from at least one of the three major credit reporting agencies. All offer services for free and are available to all consumers.

Credit Karma

Credit Karma was one of the first online services to offer your credit scores for free. This service offers scores and reports from two agencies: Equifax and TransUnion (both VantageScore). Scores and reports are updated weekly. They also offer free daily credit monitoring, but only for TransUnion.

Credit Karma is the only service we know of that offers free scores from two different agencies; it is also the only one that pulls data from Equifax. Additionally, it offers a number of other useful financial tools for consumers, including personalized credit card and loan recommendations, financial calculators, informative financial blog posts, and even help filing your taxes.

Discover Credit Scorecard

Discover has recently started offering free credit scores to all consumers, regardless of whether or not you are a Discover customer. This is one of the only services to offer a free FICO score; most free credit score services provide your VantageScore. Discover’s FICO score is derived from Experian, and it’s updated on a monthly basis.

Be aware, however, that because FICO offers a number of scores, the score shown on your Discover Credit Scorecard might not be the same score that your creditors are using. However, it might still be worth a look for educational and general credit monitoring purposes.

WalletHub

WalletHub offers a free score and report from TransUnion (VantageScore). This is the only free credit score service that updates on a daily basis.

In addition to your credit score, WalletHub offers other useful services to improve your credit and financials. Customers receive free monitoring of their TransUnion account, as well as services such as customized advice to improve your credit, credit card recommendations, and savings alerts.

Credit Journey from Chase

Chase offers TransUnion scores and reports via Credit Journey. This service is free and available to all consumers (not just Chase customers). Your score is updated on a weekly basis.

Chase also tracks your score over time and has a credit score simulator that shows how your score might change if you take certain actions.

Free Annual Credit Reports

You should know that, by law, Experian, TransUnion, and Equifax are required to issue a free copy of your credit report every 12 months. Consumers who request a free copy of their report will receive a full copy, whereas many free services only offer a limited report. You can use your free annual reports to review the information included and contest any mistakes that you find.

Unfortunately, your annual free credit report does not include any actual credit scores. To access this information, you’ll have to sign up for a free credit score service or pay for your scores.

Annual credit reports can be requested at AnnualCreditReport.com.

Final Thoughts

Because free score services only offer scores derived from one or two agencies and don’t always offer a full credit report, it’s a good idea to also request free copies of your credit reports from AnnualCreditReport.com on a yearly basis and contest any mistakes that you have found.

That said, free credit score services are useful for educational purposes and general credit monitoring — just remember that the specific score shown is unlikely to be the same score that your creditors see. However, a free score service can give you the tools you need to improve and maintain your credit score. All the services listed above are free, easy to use, and offer useful services in addition to your credit score.

Do you need to improve your credit? Read about five ways to improve your score.

The post The Best Free Credit Score Services appeared first on Merchant Maverick.

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The Best Banks For Small Business Loans

Not impressed with the easy applications but high interest rates offered by alternative lenders? Well, the good news is that, despite the ubiquity of online financing, most of the best rates in the business continued to be offered by local banks and credit unions. Because you’re likely to encounter stricter credit requirements, as well as geographic constraints, the best bank for your small business is often one you’ve already built a good relationship with. Below we’ll look at a few of the biggest financial institutions that offer business lines of credit, business term loans, and SBA loans, as there’s a better chance of them operating in your area.

If your credit is below 600 or your business hasn’t been around very long, you’ll likely have a hard time qualifying for a bank loan from any of the lenders below. Online lenders like Ondeck, Lendio, LoanBuilder, and National Business Capital often have less stringent qualifications when it comes to credit scores and time in business. Our small business loan comparison chart can point you in the right direction.

Here are the best banks for small business loans.

1. Chase Bank

Best For: Small businesses and start-ups with excellent credit.

Borrower requirements:
• Must have excellent credit (high 600s)
• Must have access to a Chase Bank branch
Read our Chase Bank review

Checkered reputation aside, Chase is one of the largest and most accessible banks, boasting tons of locations — especially in the nation’s most populous states. Chase Bank also features some of the best small business loan rates you’re likely to see from a for-profit lender.

Chase offers business lines of credit, business term loans, and SBA loans to small businesses.

How To Apply For A Chase Loan

Despite its position as industry leader, Chase is surprisingly traditional when it comes to the lending process; you’re going to have to go to a branch and meet with a Chase representative in person.

Takeaway

With high credit requirements, Chase is a fortress that’s tough to breach, but businesses with excellent credit will find some of the best rates in the industry.

2. Wells Fargo

Best For: Businesses looking for a modern and easy application process.

Borrower requirements:
• Must have $1.50 in cash flow for every dollar borrowed.
• Must have a personal credit score of 640 or above.
Read our Wells Fargo review

Wells Fargo (read our review) has developed a reputation for being a big bank that’s willing to work with small businesses. Like Chase, Wells Fargo has made some headlines for the wrong reasons in recent years, but most of those aren’t related to this area of lending.

Wells Fargo is notable for offering fast, unsecured business loans online (similar to those of an alternative lender), but at bank rates. The online application process can be especially useful for businesses without a branch nearby.

Wells Fargo offers business terms loans, lines of credit, and SBA loans.

How To Apply For A Wells Fargo Loan

Depending on the product you want, you’ll be able to either apply online at Wells Fargo’s site or will have to go to your local branch to meet with a Wells Fargo representative. You can apply for unsecured loans online.

Takeaway

Businesses seeking bank interest rates with some alternative lender conveniences should give Wells Fargo a look.

3. U.S. Bank

Best For: Mature small businesses outside of the East Coast, including areas underserved by bigger banks.

Borrower requirements:
• Must be located in a state served by U.S. Bank
• Must have been in business for two years
Read our U.S. Bank review

U.S. Bank (read our review) is one of the largest national banks in the country, serving the middle and western parts of the country. For some areas, it is the biggest banking institution available.

U.S Bank has a reputation of being a bit more personable and flexible than many of its similarly-sized or larger competitors while offering competitive interest rates. Just be aware, U.S. Bank prefers to lend to well-established businesses.

You can get a term loan, line of credit, or SBA loan through U.S. Bank.

How To Apply For A U.S. Bank Loan

U.S. Bank provides several options for application, which you can do by submitting a contact form, calling them directly, or going to your local branch. You will, however, eventually need to meet with them personally to complete your application.

Most importantly, you’ll need to live in one of the 25 states served by U.S. Bank.

Takeaway

U.S. Bank may be a good option for established companies that may not want to do business with a huge, international behemoth. East Coasters will have to look elsewhere, however, as the bank has no immediate plans to enter that market.

4. Bank of America

Best For: Mature businesses with excellent credit.

Line of credit borrower requirements:
• Must have been in business at least 2 years.
• Must have a personal credit score of 670 or above.
• Must have revenue > $200,000 for unsecured products, or greater than $250,00 for secured products.
Read our Bank of America review

Bank of America (read our review) is one of the more conservative lending institutions on this list, but it does offer a versatile array of products at excellent rates and, as the second largest bank in the country, is accessible to most population centers in the U.S.

Despite stringent lending standards, the bank has modernized its application processes more than some of the other banks on this list.

Bank of America offers business lines of credit, business term loans, and SBA loans to small businesses.

How To Apply For A Bank of America Loan

If you already have a Bank of America ID (from an existing account), you can use it to apply for unsecured loans and lines of credit on the Bank of America site.

You’ll need to submit basic information about yourself and your business, as well as your number of employees, profit, sales, outstanding obligations. You’ll also need to submit personal information about each additional business owner, guarantor, and controlling manager.

Depending on the product, you may need to have a business checking account with Bank of America if auto-debiting is required.

If you’re not a current customer, you’ll need to apply by phone or at your local branch.

Takeaway

Bank of America offers some online convenience for existing customers while providing the excellent rates you’d expect from a large banking institution. Their steep prerequisites might disqualify many businesses, however.

5. TD Bank

Best For: Mature East Coast businesses with excellent credit

Borrower requirements:
• Must have been in business for 2 years
• Must have excellent credit, 680 or above
Read our TD Bank review

T.D. Bank (read our review) may be of particular interest to readers located on the East Coast (particularly those who let out a forlorn sigh when they read that U.S. Bank doesn’t operate in their region). T.D. Bank operates almost exclusively on the East Coast and can be a good option for those looking to avoid the Big Four.

Businesses seeking less than $100,00o in funding will appreciate the fact that T.D. Bank doesn’t charge origination fees on small loans.

Small businesses can get a term loan, line of credit, or SBA loan through T.D. Bank.

How To Apply For A T.D. Bank Loan

While they’re fairly traditional, T.D. Bank gives you the opportunity to begin your application from home by downloading forms available on their site. Depending on the type of financing you’re seeking, you may need to attach additional information or forms.

You can also submit your information in a contact form if you’d like a representative to help walk you through the process.

Takeaway

While East Coasters usually have a lot of banking options available to them, T.D. can be a reasonable compromise for those looking to working with a reasonably large, but not behemoth lending institution.

Final Thoughts

You have as many potential bank loan options as you have banks operating in your area. That said, they can be tough nuts to crack, especially for businesses with less-than-perfect credit.

Don’t think you can make the cut for a traditional bank loan?

Online lenders, like Ondeck and Lendio, aren’t quite as particular when it comes to credit scores and time in business. Our small business loan comparison chart can point you in the right direction.

The post The Best Banks For Small Business Loans appeared first on Merchant Maverick.

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What Is Cash Flow?

Have you ever sat by the ocean and watched the tide ebb and flow for hours? If so, you probably know a lot about water flow. As a business owner, though, you should be more focused on cash flow. What is cash flow? We’re glad you asked!

Aptly named, cash flow is the money that flows in and out of your business. Cash flow is the sustainer of life for your business. Without positive cash flow, your business is in serious trouble.

In this article, we’ll teach you everything you need to know about what cash flow is and how it works, the difference between positive and negative cash flow, and how cash flow affects your business.

Cash Flow Definition

Cash flow is the money that comes into and goes out of your business. It is also one of the key indicators of how financially healthy your business is. You may hear people use the terms cash inflow and cash outflow. That may sound complicated, but it’s actually pretty simple:

  • Cash Inflow: Cash that comes into your business (ex. sales, interest earned, etc.).
  • Cash Outflow: Cash that leaves your business (ex. employee paychecks, inventory purchases, etc.).

Cash Flow VS Profit

It’s incredibly important to know the difference between cash flow and profit. A business making a large profit can still go bankrupt if it doesn’t have a strong cash flow. Here’s why.

In accrual accounting, income is recorded when products or services are agreed upon, not when they are paid for. Say you send an invoice of $200 to a customer. Your income account will go up by $200, yes. But your cash accounts don’t go up just because your income or profit accounts have. You still have to wait for your customer to pay their invoice, which sometimes can take months. (Invoices that are not yet received are called “accounts receivable.”)

So if you really want to know how much money your business has on hand, you have to look at your cash flow, not your profit.

Positive VS Negative Cash Flow

Businesses can either have a positive or negative cash flow.

  • Positive Cash Flow: When your business earns more than it spends during a certain period.
  • Negative Cash Flow: When your business spends more than it earns during a certain period.

A positive cash flow indicates that your business is healthy and you have enough cash to pay your employees, cover your business operating expenses, and maybe even expand your business. A negative cash flow indicates that you may have trouble paying for your business expenses and turning a profit.

Generally, positive cash flow is best. However, shy away from automatically assuming that a positive cash flow is good and a negative cash flow is bad. It’s important to know why your cash flow is positive or negative.

In the same way that profit doesn’t always equal cash flow, a positive cash flow doesn’t always imply profit.

For example, say you run a craft store that earns half its income selling supplies and the other half teaching sewing classes. If interest in sewing dies down, you may decide to focus on retail and liquidate (or sell) all of the sewing machines you bought. When you sell your machines, you will see a positive cash flow, but you won’t be earning the other half of your income anymore.

This is just one example of why it’s important to analyze your cash flow so you can truly understand the financial state of your business.

What Is Operating Cash Flow?

Cash flow can be calculated in several different ways. Each way gives you a different insight into your business’s cash flow. One of the most common cash flow calculations you’ll see is operating cash flow.

On the cash flow statement (a report of your business’s cash flow status), there are three different sections:

  • Cash flow of operating activities
  • Cash flow of investment activities
  • Cash flow of financial activities

Cash flow of operating activities and operating cash flow are one and the same. Operating cash flow shows you how much cash you’ve made from your business operations. It’s calculated by subtracting business expenses like payroll and inventory from income generated through sales that have been paid in cash.

What Is Net Cash Flow?

Net cash flow, or total cash flow, is the difference between a business’s cash inflows and cash outflows. Net cash flow is calculated on the cash flow statement by adding the cash flow of operating activities, investment activities, and financial activities together.

What Is Free Cash Flow?

Free cash flow refers to the cash that is actually available to use. Free cash flow shows all of the cash left over after paying for a business’s capital expenditures (capital expenditures are the expenses spent on purchasing or maintaining a company’s assets like buildings or equipment).

When you hear people (especially lenders) talk about free cash flow, you may hear the terms unlevered free cash flow and levered free cash flow.

  • Unlevered Free Cash Flow: Unlevered free cash flow is the free cash flow available before a company pays its debts, interest, and other financial obligations.
  • Levered Free Cash Flow: Levered free cash flow is the free cash flow available after a company pays its debts, interest, and other financial obligations.

Direct VS Indirect Method Cash Flow

There are two different ways of calculating cash flow and presenting the cash flow statement.

Remember how earlier we said that the cash flow statement is divided into three sections: cash flow of operation activities, cash flow of investment activities, and cash flow of financial activities?

The difference between the indirect and direct method is how the operating cash flow appears on the cash flow statement.

  • Direct Method: The direct cash flow method breaks down specific cash inflows and outflows and shows you the cash receipts from customers, cash paid to vendors and suppliers, cash collected from customers, interest earnings, dividends received, paid income tax, and paid interest. Adding these totals together is how the operating cash flow is calculated.
  • Indirect Method: Instead of tracking each type of business operation cash flow, the indirect cash flow method is calculated by taking the net income from a company’s income statement and adjusting the earnings before interest tax (EBIT). It sounds confusing until you remember the difference between cash flow and profit. The net income shows your overall profit — we need to adjust it to show cash flow by subtracting accounts receivable (or invoices that haven’t been paid yet).

While the direct method of calculating cash flow is more detailed, the indirect method is far easier to calculate and more widely used by businesses. The good news? If you’re using accounting software, it does all of the behind the scenes work for you. You’ll just see the total operating cash flow on your cash flow statement.

Don’t have good accounting software yet? Our comprehensive accounting software reviews cover QuickBooks products, Xero, Freshbooks, Sage, and more of the top cloud-based and locally-installed accounting solutions on the market today. If you want a quick peek at the top contenders, check out our accounting software comparison chart.

Using an old version of QuickBooks Pro? Save $100 when you upgrade to QuickBooks Desktop 2018.

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Why Cash Flow Is Important

As we mentioned earlier, cash flow is the sustainer of business. Positive cash flow allows you to:

  • Pay your employees
  • Pay rent
  • Purchase inventory
  • Purchase new equipment
  • Grow your business

Essentially, positive cash flow means you can run your business successfully. If you lack cash flow, you will have a hard time operating your business and paying your business expenses on time.

If you consistently have a negative cash flow, you may even be forced to declare bankruptcy. According to the SBA (Small Business Administration), lack of positive cash flow is one of the biggest reasons that businesses fail.

Additionally, both potential lenders and investors take your business’s cash flow into consideration.

Before approving you for a loan, lenders want to see that you have a consistent positive cash flow and that you have the money to make regular payments on a loan.

Potential investors also want to see positive cash flow, which indicates that your company is financially stable and that they are likely to receive shareholder payments if they support your company.

Final Thoughts

You may have come into this article assuming that focusing on profit is the best thing you can do for your business. In the end, however, it all comes down to cash flow.

Without an understanding of cash flow, you won’t be able to run a business successfully. Nor will you be able to apply for funding from potential lenders to grow your business in the future. Pay attention to the cash flow reports in your accounting software, and you’ll be well on your way to maintaining positive cash flow and increasing overall profitability.

After analyzing your business’s finances, you may determine that you need a working capital loan or a line of credit to help you maintain positive cash flow. Read through our detailed small business loan reviews or view our business loan comparison chart to find a lender that works for you. If your business depends on invoices, invoice factoring might be more your speed. With invoice factoring, it’s possible to get cash for your invoices right away. Learn more in the Basic Introduction to Invoice Factoring and/or check out two of our favorite invoice factors: BlueVine and Fundbox.

For more information on accounting concepts and strategies, our accounting and bookkeeping blog is a good place to start. We cover everything from double-entry accounting to small business taxes. We also guide you through how to choose small business accounting software. What’s more, our comprehensive accounting software reviews cover QuickBooks products, Xero, Freshbooks, Sage, and more of the top cloud-based and locally-installed accounting solutions on the market today. For a bird’s eye view of the top contenders, check out our accounting software comparison chart.

The post What Is Cash Flow? appeared first on Merchant Maverick.

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Can I Afford A Small Business Loan?

Can You Afford A Small Business Loan?

“Can I afford a small business loan?”

For many business owners, this is (literally) the $64,000 question!

With so many variables in play, it may seem daunting to calculate whether you can actually cover new loan payments. Luckily, there are multiple financial ratios in place to help you do just that.

In this post, we’ll teach you how to use the debt service coverage ratio and the debt-to-income ratio to determine whether you can afford a loan, what borrowing amount is right for you, what monthly payment you can afford, and if a loan is actually the right choice for your business. (If it turns out, based on these ratios, that you can’t afford a business loan just yet, we’ll also give you six practical tips to better your financial situation.)

Read on to see if your small business is ready for financing.

Is A Small Business Loan Right For Me?

This is the very first question you should ask yourself. Just because you can afford a loan doesn’t mean you should take one out. Before you start seeking funding, take the time to really consider your business’s financial situation.

Ask yourself what problems you would be solving by taking out a business loan and consider whether there is another way to solve those problems.

For example, if you’re looking for start-up funding, have you considered venture capital? Angel investors? Crowdfunding? If you’re having trouble maintaining consistent cash flow, have you carefully analyzed your operating costs or cut back unnecessary business expenses to increase revenue?

Make sure to explore all of your options before jumping the gun on your loan search. Now, that being said, there are plenty of solid reasons to get a business loan:

  • To expand your business
  • To purchase inventory
  • To buy equipment
  • To cover off-season expenses
  • To take on a new, high-potential project
  • To build business credit

When determining whether a small business loan is right for you, carefully meditate on your business’s short-term and long-term goals. If you haven’t already, make a business plan to help you achieve your future goals.

If a loan fits into this plan and benefits your business, great!

Next, we’ll talk about how to know if you can actually afford a loan, how much you can borrow, and what to change if you can’t afford a loan.

What Do Small Business Lenders Look For?

At the most basic level, lenders want to see that:

  1. Your business has enough cash flow to afford monthly payments.
  2. You can make those payments on time.

There are many factors that lenders consider when analyzing a loan application, but some of the most important variables are your credit score, your debt service coverage ratio, your debt-to-income ratio, and your ability to put up collateral.

We’ll cover all of these factors in greater detail below.

Using The Debt Service Coverage Ratio

The debt service coverage ratio is one of the main tools lenders use to determine whether you are eligible for a loan — it’s also one of the most important calculations small business owners can do before taking on new debt.

The debt service coverage ratio (DSCR) measures the relationship between your business’s income and its debt. Lenders use this ratio to gauge the risk of lending to you and to see if you can afford to make payments on a loan, given your business’s cash flow.

How To Calculate The Debt Service Coverage Ratio

Each lender calculates the debt service coverage ratio differently. Some lump the business owners’ personal income in with the net operating income; others don’t. We’ll cover the most common DSCR formula, but be sure to ask your lender how they calculate DSCR for the most accurate ratio.

Most often, your business’s DSCR is calculated by dividing your net operating income by your current year’s debt obligations:

Net Operating Income / Current Year’s Debt Obligations = Debt Service Coverage Ratio

Your net operating income is the total revenue generated by selling services or goods, minus your operating expenses (operating expenses include things like inventory, employee wages, rent, utilities — anything that is directly related to purchasing, creating, or selling your goods and products).

Your current year’s debt obligations comprise the total amount of debt you must repay in the next year, including interest payments and fees.

Let’s look at an example:

A business owner wants to know whether or not they can afford a loan to purchase some new equipment. The business takes in $65,000 in revenue annually but pays $15,000 in operating expenses, resulting in a net operating income of $50,000.

Each month, the business spends $2,000 on its mortgage, $400 on a previous loan, and $100 on a business credit card, making a total monthly debt of $2,500. Since the DSCR calculation requires the current year’s debt, we need to multiply our monthly debt by 12. That gives us a total of $30,000 in debt obligations for the year. Now, let’s plug these numbers into the DSCR formula from earlier.

Net Operating Income / Current Year’s Debt Obligations = Debt Service Coverage Ratio

50,000 / 30,000 = Debt Service Coverage Ratio

50,000 / 30,000 = 1.666667

When you divide 50,000 by 30,000 you get 1.666667. Round this number to the nearest hundredth to get a current debt service coverage ratio of 1.67.

We’ve successfully calculated a debt service coverage ratio! Plug in your business’s information to determine your own DSCR.

What Is The Ideal DSCR?

How do we know what a good DSCR is? What does the DSCR mean in terms of your business?

When it comes to DSCR, the higher the better. Let’s say your DSCR is 1.67, like in our earlier example; that means you have 67% more income than you need to cover your current debts. A DSCR ratio of 1 would indicate that you have exactly enough income to pay your debts but aren’t making any extra profit. If your DSCR is below one, then you have a negative cash flow and can only partially cover your debts.

Obviously, you don’t want a negative cash flow, and breaking even doesn’t quite cut it if you want to take out a loan. So what’s the ideal debt service coverage ratio?

In general, a good debt service coverage ratio is 1.25 or higher. This can vary by lender and by the state of the economy, but overall, a high DSCR suggests that you have enough income to take on another loan and are more likely to qualify for the loan you want.

How Much Can I Borrow?

Not only can your DSCR tell you if you can afford a loan, it can also help you determine the size of the loan you should take out.

Let’s take a look at our earlier example again. We calculated the business’s DSCR at 1.67. This is well above the 1.25 DSCR mark, yes, but it doesn’t necessarily tell you the size of loan the business can afford to borrow.

To figure out the amount the business can safely borrow, we’ll take its annual income and divide it by 1.25:

Net Operating Income / 1.25 = Borrowing Amount

50,000 / 1.25 = 40,000

From the calculation above, we can see that the business can afford to pay up to $40,000 a year on total debt obligations. In our example, the current year’s debt obligations were already $30,000/year. All in all, the business can take on an extra $10,000/year in debt (because $40,000 – $30,000 = $10,000). That amounts to roughly $830/mo.

Plug your own information into the equation so you can determine the ideal borrowing size for your small business loan. This will give you a clear idea of how much you can realistically afford to pay each month before you go and speak to a lender.

To learn more about the debt service coverage ratio, read our post Debt Service Coverage Ratio: How To Calculate And Improve DSCR.

Using The Debt-To-Income Ratio

Lenders also use your personal debt-to-income ratio to evaluate whether or not your business is eligible for a loan. The debt-to-income ratio is used primarily for personal loans (especially mortgages), but this ratio is still important for small businesses, especially sole proprietors.

The debt-to-income (DTI) ratio is a financial tool used to measure the relationship between a person’s debt and income.

Why Is DTI Important?

Your DTI is an important indicator of your trustworthiness. Whereas your credit score shows how likely you are to make your payments on time, your debt-to-income ratio shows lenders if you can afford the monthly payments on a personal loan or mortgage.

But if the debt-to-income ratio is predominantly for personal loans and mortgages, why is it important for small businesses?

For sole proprietors and freelancers seeking funding, this ratio is particularly important. Since sole proprietors aren’t legally considered separate business entities, they don’t have a debt service coverage ratio. Instead, the debt-to-income ratio is the main tool lenders will use to analyze a loan application.

While the debt service coverage ratio is by far a better indicator of small business’s financial state, lenders still look at the business owner’s DTI ratio. Lenders evaluate your DTI to see if you are trustworthy and to ensure that you can personally guarantee your business loan if no other collateral is provided.

When deciding whether your business can afford a small business loan, make sure you also consider if you can afford to personally take on the business loan payments if your business goes under. No one wants to think about the fact that their business may fail or that they might default on a business loan. But this scary reality is one you must consider before accepting a business loan. If you can’t afford to offer up collateral or take on the implications of a personal guarantee, then maybe a business loan isn’t right for you.

How To Calculate The Debt-To-Income Ratio

To calculate your debt-to-income ratio, divide your total recurring monthly debt by your gross monthly income:

Total Monthly Debt / Gross Monthly Income = Debt-To-Income Ratio

Your total monthly debt should include all recurring minimum monthly debt payments, while your gross monthly income should include your total monthly income before taxes.

Let’s do an example:

You’re trying to use your DTI to see if you qualify for a mortgage. You pay $300/mo for your car and $200 on student loans for a total monthly debt of $500. Your monthly gross income is $3,500/mo.

500 / 3,500 = Debt-To-Income Ratio

500 / 3,500 = 0.142857

When you divide 500 by 3,500, you’re left with 0.142857. To turn this decimal into a percentage, simply move the decimal point two places to the right and round to the nearest tenth. This gives you a current debt-to-income ratio of 14%. Easy!

Add your own financial information into the formula to see what your debt-to-income ratio is.

What Is The Ideal DTI Ratio?

Now that you know how to calculate your DTI ratio, what does that percentage mean? How do you know if you have a good DTI ratio or a poor ratio?

Unlike DSCR, when it comes to debt-to-income ratios, the lower the better. A low DTI indicates that you can afford to take on an additional loan and are more likely to get approved for the loan you want. A high DTI ratio means that you may have too much existing debt or too little income to be able to afford monthly payments on a new loan.

Generally, a DTI ratio of 36% or lower is considered a good debt-to-income ratio. Many lenders will finance (up to) 43%, but if your DTI is higher than 43%, you may have a hard time getting approved for a loan.

However, these percentages may vary by lender. Real estate and mortgage lenders are known to stick more closely to these guidelines, while other lenders may be more lenient. So be sure to research your lender’s requirements.

What Monthly Payment Can I Afford?

You can use the debt-to-income ratio to determine how much you can afford to pay each month on a loan.

This calculation is most important for sole proprietors seeking funding and individuals seeking mortgages. However, small businesses should still do this calculation to make sure that they can personally afford to cover the payments on a defaulted loan.

Let’s return to our example from earlier. Remember, you were trying to qualify for a mortgage loan. We calculated your current debt-to-income ratio at 14%.

To maintain a good debt-to-income ratio, you don’t want your total DTI ratio to exceed 36%. That means a potential mortgage can take up 22% of your total debt-to-income ratio (36 – 14 = 22).

In this example, to determine the size of the mortgage loan payment you could afford each month, simply multiply your gross monthly income by 22%. (To convert the percentage to a decimal, move the decimal point two spaces to the left.)

3,500 x .22 = 770

Assuming you still want to stick to a 36% DTI, you can afford to pay $770/mo on your mortgage while continuing to make your other monthly loan payments and covering everyday expenses.

To learn more about DTI, read our complete post: Debt-To-Income Ratio: How To Calculate And Lower DTI.

Consider Your Return On Investment

Finally, when determining whether your business can afford a business loan, you want to make sure the benefits ultimately outweigh the costs.

If you are spending the time, money, and effort on a loan, it’s important to have a good return on investment (ROI). Able Lending puts it this way:

The reasonable expected return on your investment must be greater than the APR.

In other words, a loan is only worthwhile if it ultimately helps your business’s profits exceed the costs of the loan, plus interest and fees. Before you borrow money, make sure you have a clear business plan and know exactly how you intend to use your loan to improve your business.

What If I Can’t Afford A Loan?

If you’ve made it to the end of this post and realized that you can’t afford a loan, don’t worry. It’s not the end of the world. There are plenty of ways to improve your business’s financial position so that you can afford a loan in the future.

1. Increase Revenue

Increasing your income can open the doors to more business opportunities and additional funding. By increasing revenue, you can improve your DSCR, lower your DTI ratio, and boost your chances of qualifying for a loan.

2. Decrease Existing Debt

Another way to increase DSCR and lower DTI is to pay off some existing debt. With old loans out of the way, you can move on and take out new loans to help propel your business forward.

3. Improve Your DSCR

We already mentioned that increasing your revenue and decreasing your existing debt can help improve your DSCR. Another way to improve your debt service coverage ratio is to decrease operating expenses. By cutting back on unnecessary expenses and streamlining your business processes, you’ll have a greater overall net operating income — which means more money that you could apply towards a loan.

4. Lower Your DTI

We also already mentioned that increasing your revenue and lowering your debt improves your debt-to-income ratio as well. For borrowers seeking a mortgage, making a bigger down payment is another good way to lower your DTI and decrease the size of your monthly payments.

5. Improve Your Credit Score

Another major roadblock businesses and individuals run into when seeking funding is a low credit score. Improving your credit score can help unlock better loans and rates. To learn more, read the Ultimate Guide To Improving Your Business Credit Score or our article on 5 Ways To Improve Your Personal Credit Score.

6. Lower Your Borrowing Amount

Maybe you really can afford a loan right now and just need to lower your borrowing amount. You may not be able to afford the $100,000 loan you were hoping for, but can you afford the monthly payments on a $50,000 loan? If you can satisfy your needs with a smaller borrowing amount, you should try to do so; if a smaller amount won’t meet the brief, use the first 5 tips above to improve your financial situation so you can afford the loan you want.

Final Thoughts

When wondering whether you can afford a small business loan, you should ask yourself:

  • Do I have a debt service coverage ratio of 1.25 or higher?
  • Do I have a debt-to-income ratio of 36% or lower?
  • Do I have collateral or can I confidently sign a personal guarantee?
  • Will the loan lead to a good return on investment?

If you’ve answered yes to all of these questions, odds are your business is in a healthy financial spot to take on a new small business loan. Use the debt service coverage ratio and debt-to-income ratio to discover exactly how big of a loan you can afford.

Wondering what type of small business loan you should take out? Not all loans are created equal, and a bank loan will be worlds apart from an atypical online lending product. Traditional term loans, short-term loans, SBA loans, and merchant cash advances all have very different rates, fees, and terms. Make sure you understand the differences between different types of funding before you jump the gun on any loan product. Our small business loan calculators can help.

Looking for good lending options? Our small business loan reviews cover online lenders and major banks that offer various types of loans (bank loans, SBA loan, short-term loans, installment loans, lines of credit and more). If you’re just starting out, you might want to consider taking out a personal loan and using it for your business.

To evaluate multiple low-interest lenders at once, it’s a good idea to use a free loan matchmaking service, often called a “loan aggregator.” Merchant Maverick has partnered with Mirador Finance, a financial technology company, to bring you the Merchant Maverick Community of Lenders. By filling out one application, you can be matched to multiple potential lenders. Check your eligibility below.

Borrower requirements:
• Free loan aggregation service; requirements vary by area and lender.
Check your eligibility
Learn more about the Community of Lenders

If can’t afford a loan yet, you should focus on increasing your ability to afford a loan and your chances of getting approved by a lender. Download our free Beginner’s Guide To Small Business Loans for more information, or consult any one of the following articles:

Debt Service Coverage Ratio: How To Calculate And Improve DSCR

Debt-To-Income Ratio: How To Calculate And Lower DTI

The Ultimate Guide To Improving Your Business Credit Score

5 Ways To Improve Your Personal Credit Score

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