First-Time Business Loans — the Best Time to Apply

The best and worst time to apply for a business loan is a bit of a paradox. The best time to apply for a business loan is when you don't need the loan. The worst time to apply for a business loan is when you need the money.

Let’s break this down. When a business needs money, it's usually because it’s under some sort of financial duress. When a business is struggling financially, it's a riskier proposition for lenders to loan out the money to them.

When a business is doing great financially, lenders determine a business as having much less risk. The less risk, the easier it is to get a business loan. The more risk you are to a lender, the more challenging it will be for you to convince them to lend you the money.

Here are some things to consider when deciding the best time to take out a business loan:

Decide why you need the money. The reason why you need the money will greatly determine the type of loan you will need. Different loans have different lender requirements. Knowing what type of loan you need will give you a leg up when figuring out the best time to apply for a business loan.

Understand the different loan types. There are several different types of loans businesses can pursue. These include:

• Term loans
• Business lines of credit
• Equipment loans
• Invoice financing
• Merchant cash advances
• Commercial mortgage loans
• Small Business Association (SBA) loans
• Short-term loans

Be strategic. The number one reason why a business fails is because of cash flow shortages. All businesses need proper cash flow to survive and prosper. Some reasons you may need a business loan include:

• Seasonal holidays
• Busy season
• When your business is profitable
• When you want to roll out a new product or service
• When an economic opportunity lands on your doorstep
• When interest rates are low
• During a slow season

One of the biggest mistakes businesses make is not knowing the business loan options available to them. It's important to understand the varying loan types so you can decide which loan is best for your business.

Here are the most common types of business loans available to businesses:

Term Loans

Term loans are the most common business loan. They offer flexibility and can be used for just about anything from hiring staff to purchasing inventory and everything in between.

Term loans usually provide businesses with a good sum of money. They also offer fixed terms, so the business knows exactly what they must repay each month. Terms can extend from a couple of years to a few years, depending on the business’s approved amount.

Business Line of Credit

Think of a business line of credit as you would a credit card loan. With a business line of credit, a financial institution extends a line of credit to the business.

The business is charged interest only on the money it spends from the credit line. These loans are flexible and can be accessed at any time. A business will need near-perfect credit, a good business credit score, and a track record of successful borrowing to qualify for these loans. A business line of credit is a revolving line of credit, and because this debt is revolving, the interest rates can be higher than a standard term loan.

Having access to a business line of credit can help a business during a cash flow crisis. Once your business qualifies, it might be a good idea to apply for a business line of credit.

Equipment Loans

An equipment loan is exactly what it sounds like: it is a loan used to purchase equipment for a business. This equipment can include machinery or other technologies.

With these types of loans, the lender will oftentimes require a 20% down payment on the equipment to bring down the risk. In addition to this, the equipment itself is used as collateral for the loan. If a business fails to make a payment, the lender can instantly take possession of the equipment. The more payments a business makes on an equipment loan, the less risk it is for the lender.

Consequently, the longer a business pays on an equipment loan, the greater the risk for the business. This is because if a business makes steady payments for several years on a piece of expensive equipment and then fails to make the payments, the lender then has the legal right to take possession of the equipment and resell it for a significant profit.

The business is out all the money they spent up until this point. The nice thing about equipment loans is that a business doesn't necessarily have to have perfect credit to qualify since the equipment is used as collateral for the loan.

Invoice Financing

Think of invoice financing as a short-term loan. Invoice financing is where a business sells off unpaid revenue at a discounted rate. The lender will usually withhold 20% back until the unpaid revenue has been collected. When the unpaid revenue is received, the lender then disperses the rest of the loan.

Merchant Cash Advance

A merchant cash advance is not a standard loan. A merchant cash advance provides immediate cash in exchange for a discounted portion of future sales.

Most merchant cash advances are based on credit card sales coming into the business. The merchant cash advance lender assesses risk based on the number of transactions and how much they are on a daily basis. They then extend a loan and subsequently take a daily percentage of credit card sales each day until the loan is repaid in full.

These are usually high-interest loans. The nice thing about merchant cash advances is that the terms are not set in stone. A business isn't required to pay money they don't have coming in yet. At the same time, if they don't have money coming in, the interest will compound and can be quite expensive for the business.

Commercial Mortgage Loan

A commercial mortgage loan is taken out when a business wants to purchase real estate or refinance a real estate loan.

Sometimes refinancing makes sense when interest rates are low, and the cost of borrowing money becomes cheaper. It is worth noting that commercial mortgage rates are generally lower than term loans and other types of business loans. These are considered long-term loans. Businesses generally have 15 to 30 years to repay the debt, and the terms are generally fixed.

The downside to these loans is it can stunt growth during times of economic opportunity. In such cases, a business may have to take out additional loans in order to capitalize on the immediate opportunities in front of them.

Learn more about different types of mortgages and find the right loan for you. Read our guide to Types of Mortgages.

SBA Loans

SBA loans are guaranteed by the US Small Business Administration. These loans come through government-approved lending agencies. These lending agencies are more likely to lend to small businesses and startups since the loans are guaranteed by the SBA.

Because these are government-backed loans, the approved lender is repaid by the government should a small business default on repaying the loan. These types of loans are great for small businesses that need to get a business off the ground. The downside with SBA loans is that they have several requirements and hoops to jump through before a business can get approved. Apply early for these loan types.

Short-Term Loans

Short-term loans are easier to get than long-term loans. Businesses take out these types of loans in order to solve immediate cash flow problems. This could be to pay salaries, hire new staff, pay for inventory, etc. These types of loans come with flexible payment terms, though the interest rates may be higher.

When to get a business loan is just as important as knowing the types of loans available to you. It's important to plan financing well in advance to ensure the business qualifies for the loan. It's important to maintain good business credit so the business can get qualified for lending.

Here are some different times a business might want to take out a business loan:

• Holiday seasons: During the holiday season, businesses may get a jolt in sales activity. If a business doesn't have access to capital to order more products, it may lose out on valuable sales opportunities.
• Busy seasons: Some businesses experience certain seasonal explosions in growth. For example, a car dealership may have lackluster sales in January and February, but during November and December, they may sell every car on the lot. In this industry, being able to plan your inventory goals strategically is of necessary importance. It can mean the difference between life and death for the business. For this reason, it's important to have cash on hand during the busy season.
• Increased Profitability: When a business is profitable, it means an increase in growth is happening. The more growth a business can sustain, the less risk the business is to lenders. When businesses pose less of a threat to lenders, there will be better interest rates. This makes acquiring a business loan a much better proposition for the business.
• New products and services: When a business wants to roll out a new product or service, it may need additional capital to make this happen. It's best to apply for a loan well in advance when a business knows about the time new products or services will be rolled out. This way, the business has the necessary capital to fund the new product or service into the marketplace.
• Economic opportunities: Sometimes, when running a business, opportunities present themselves out of the blue. When this happens, it's important to have the adequate cash flow to take advantage of such economic opportunities. Case in point: When the COVID-19 pandemic ran rampant worldwide, many industries saw it as an economic opportunity to advance themselves. Many of these companies started purchasing equipment to make masks and other personal protective equipment for healthcare workers and the general public. Seizing the opportunity, many of these businesses saw record growth during that period.
• Right interest rates: When interest rates are right, it may be the perfect opportunity for businesses to take out a small business loan. Once the interest is factored in, the business could pay a lot less money than had it waited to take out the loan, even a month later. When the cost of borrowing money is less, it's a great time to borrow the money, even if you don't need it at that moment.
• Slow seasons: Some businesses experience slow growth during certain times of the year. This is known as a slow season. During this time, a business may have to cut back on the number of hired staff. This can mean giving up a valuable asset for the company. To save losing the asset, a company may decide to take out a loan to maintain their payroll, keeping the employee working until the business can recoup the money during the next busy season.

Businesses face several challenges when applying for business loans. Knowing the right time to apply for a business loan is crucial. Knowing the type of loan to apply for is also equally critical. Knowing what your options are and planning strategically can mean paying a lot less money and interest while seizing opportunities that come along under your nose.

Make sure that when you're building out your business plan that you're also working on building your business credit. The better your business credit, the better your chance of getting a business loan in the future. Plan now and apply early before you need the loan. This is the secret to leveraging capital from these lenders to maintain and grow your business successfully.