Small businesses are the true engines of the American economy, creating two out of every three new jobs. But while business owners tend to be experts within their own industries, many are less familiar with ways to access the financing necessary for capital investments and business growth.
Here are five lending terms you need to know before applying for a business loan.
Business Plan
Not only will you want a plan when launching a business, but you’ll need one to get financing. It doesn’t need to be long, but your plan should cover the financial, operational, and marketing goals for your company over a three-year period. This plan will be geared toward attracting one of two potential audiences: lenders, who provide money at interest for you to pay back, or investors, who instead get a stake in your business in exchange for a piece of the profits. Learn more about developing a business plan.
Credit
As an entrepreneur, good credit is crucial to getting financing. Unlike personal credit, business credit is scored on a 0–100 scale, with anything over 75 considered “good.” To improve your chances of acquiring a loan with favorable terms, it’s important to understand the five “C’s” considered to create that score: character, capacity, capital, collateral, and conditions. Together, these factors determine your creditworthiness. Learn more about how businesses obtain credit.
Short- vs. Long-Term Financing Tools
Businesses use credit for a variety of purposes, such as funding start-up costs and growth, purchasing assets, investing in small business marketing, and for day-to-day operations. Depending on your needs, a short- or long-term financing solution may be the most appropriate
for you. Short-term tools include lines of credit and business credit cards, while long-term tools include term loans and commercial real estate loans. No matter which tool you decide on, remember it’s critical to make payments on time, as “one negative mark on a company’s report can cripple its borrowing power for years,” according to the SBA. Learn more about how businesses use credit.
Financial Statements
Financial statements are the language of your business operations, and are critical for mapping your company’s financial history, health, and future. They are also frequently required for legal or accounting compliance reasons. There are three primary financial statements that potential lenders will want to see.
- Balance sheets are a snapshot of your company’s financial stability at a given point in time.
- Profit and loss statements summarize your costs and operating expenses.
- Cash flow statements show how much cash or working capital is available by tracking how money moves through your business.
Learn more about business financial statements.
Checking vs. Commercial Checking Accounts
Besides making your small business accounting practices safer, easier, and more transparent, business banking accounts allow you to tap into numerous competitive benefits. These accounts can take the form of a number of different accounts from savings to payroll to checking, the latter of which take two forms: standard checking, which may offer lower interest rates, transaction fees, and minimum balance requirements; and commercial checking, which is better for large transactions but may require a larger minimum balance. Learn more about business banking services.
Finance, like any other industry, has its own language. By mastering the terms specific to lending, you will have a competitive advantage when it comes to preparing an attractive proposal that will maximize your chances of successfully financing your small business.
This article was developed as part of First Interstate’s partnership with EVERFI, Inc.