The minds of many small business owners are undoubtedly turning to thoughts of how to preserve cash flow. For some, this is going to mean applying for loans and lines of credit. Getting a loan during a recession can be quite different from obtaining financing during sunnier days. Let's discuss how to prepare to utilize financial opportunities for small business during a downturn from the perspective of a small business CFO advisory firm.
The Benefits of Lines of Credit
Lines of credit are pretty common in the world of small business lending. A line of credit is designed to handle short-term financing needs related to payroll, inventory, and tax planning. Here's a look at some of the flexible features:
- Approval time is fairly quick.
- Borrowers pay interest only on the borrowed amount.
- Available up to $250,000 for most borrowers.
- Borrowers can draw and repay funds as needed.
A line of credit works very similarly to a credit card. You can pull from the full available total at your own pace to cover costs. A credit line may be an easy solution for how to get a small business loan quickly if you're in good standing with your current bank. This is definitely a tool that can help small businesses reduce recession impact on a short-term basis by covering gaps. However, you may discover that your business needs a more drastic option for small business lending to buffer against recession impact. Let's talk about it.
Many states are opening up disaster loans to help small businesses dealing with the COVID-19 outbreak. Businesses can often receive working capital loans of up to $2 million when disaster financing is provided. The other big perk is that you'll be getting a locked-in preferential rate from the government that applies on a 30-year loan. Disaster loans can be used to meet capital needs like accounts payable and payroll. Additionally, funds received can be applied toward any fixed debt payment that arises as a result of the COVID-19 pandemic. Disaster financing is often one of the best options for getting a loan during a recession for those looking for low-stakes financial opportunities for small businesses.
How to Get a Small Business Loan or Line of Credit During the COVID-19 Crisis
Most lenders are going to require you to have substantial revenue that dates back at least five years. This is often all that's needed when applying for a small line of credit. However, you may be asked for collateral if you're requesting a larger sum. Keep in mind that collateral may be seized by your lender if you fail to make payments down the road.
You'll need to be prepared to submit paperwork and records regarding your small business accounting and revenue. Lenders require accurate and specific documentation before approving funding. Here's a quick checklist of what you'll need to provide during the application process:
- Business tax returns.
- Bank account information.
- Financial statements.
- Your personal credit score.
Many lenders also have minimum revenue requirements. They typically look for annual revenue of at least $25,000. Additionally, only businesses that have been in operation for a minimum of six months qualify for most financing options. The requirement for a credit score can be a bit of a wildcard. Some lenders actually skip credit scores entirely when evaluating small business bookkeeping records. Others are pretty strict about requiring a minimum credit score of 500.
Be prepared that everything from small business taxes to revenue reports will be on the table during loan reviews. What you need to know about a recession is that financing that may have been approved a few months ago may not make the cut anymore. Getting your petition for financing to the top of the pile means showing lenders that you don't pose a risk. This is one of the reasons why it's going to become increasingly important to let a financial adviser go over your small business accounting records with you to spot red flags.
Are Your Small Business Bookkeeping Records Looking Good Enough to Get a Loan?
This is a crucial time to build a relationship with small business financial advisers you can turn to for advice on what you need to know about a recession. Our team at Fusion CPA is more committed than ever to helping small business owners like you handle tax planning, accounting, and asset management. This may be the year that you turn to a small business CPA for small business tax planning for the first time. We understand, and we are here to make the change a smooth process.
One of the biggest things small business CFO advisory services can do for you is help you get organized to apply for credit or financing. Our CPAs for small businesses know how to pull out balance sheets, records for small business taxes, and other key data points that will increase the odds of being approved for financing or credit. Our experienced team of small business financial advisers can also assist you with devising a plan for small business tax planning and accounting that can free up capital. As financial advisors with experience managing crises, we encourage small business owners like you to reach out to get a financial adviser working by their side as you weather these trying times. You can learn more about our services by clicking the button below to schedule a complimentary discovery call today!
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive