Recently I heard a great tip about when to apply for a business loan from one of our service partners, who was presenting to a group of people considering self-employment: It’s easier to apply for financing either before you start your business, or after you’ve been operating for 3-4 years. Here are some reasons why.
Equity: Before you start your business, you’ve probably been saving up money to invest in your business. Lenders will be happy to see that this money is there, because it shows that you believe enough in your business to risk your own hard-earned savings.
Business Plan: It is important to plan properly. Putting together a good business plan is time-consuming and many entrepreneurs just want to get started, but a business plan really helps in figuring out if there’s a market for your product or service. If you don’t plan and you run out of money, you’ll be in a weak position to get financing.
Financial History: When you start to run your business, lenders will not only ask for your up-to-date financial projections; they’ll want to see your actual financial statements. The first couple of years of running a business are very challenging. Many businesses fail to meet their sales targets and aren’t profitable initially. But you need to have money to get money: if neither you nor the business has any cash reserves and your business is still not profitable, then it is very difficult to get a loan.
After several years, a business will probably only be in operation if it has become profitable. By that time, there is a solid financial history to support a loan application. Although previous losses may have eroded equity (i.e., owner investment), other factors may help a lender recognize that the business is still viable, such as strong sales growth and improvements in profitability.
So keep in mind when starting a business that in order to get financing down the road, you’ll need to be able to kick in some of your own cash.
Women’s Enterprise Centre’s offers small business loans to women-owned businesses in BC that can help you start, enhance or grow your BC business.