In this article, we are reviewing the documentation required for different working capital solutions. You should always evaluate the true cost of the capital you are seeking, regardless of the type of solution you choose, to make sure it is a financially sound choice for your business.
Understanding the Big Picture
When you apply for working capital (e.g. small business loan, cash advance, or invoice factoring), prospective funders will ask about your business and request financial documentation to support your answers. In brief, prospective funders are evaluating the perceived risk of your business.
While different types of funders have varying levels of documentation requirements, maintaining accurate and strong business financials will help you access the lowest cost capital for your business (see Minimum Lender Documentation Requirements Chart below). Many small businesses allow accounting to “take a back seat” to day-to-day operations. But failing to place the proper emphasis on bookkeeping will likely eliminate you from the lowest forms of financing .
The Difference Between Business Cash Advance and a Small Business Loan
It is important to understand that while a business cash advance is a working capital solution, it is not a loan. Through a business cash advance, cash advance providers purchase a portion of a business’s future receipts at a discount in exchange for a lump sum payment up front. Consequently, cash advances have no fixed “term” and can be a great solution for many businesses that want the ability to pay less during slower months.
However, business cash advances are typically more expensive than loans and providers currently operate with no form of federal oversight. When considering a cash advance, you need to be extremely careful in vetting the funder (such as checking TrustPilot) and carefully reviewing the contract. While a number of companies offer responsible cash advances, too many others use the product to operate outside of the legislative umbrella in order to offer extremely high cost products with hidden fees, such as double dipping, that can quickly lead to a debt trap your business will be unable to escape.
For purposes of this blog, we will focus on credit products.
The following are some key takeaways to consider before applying for financing.
Lenders go through a process called underwriting to assess your creditworthiness and risk. In general, the more information you provide your potential lender about your business and its finances, the better your opportunity at securing lower-cost funding.
While business and personal credit histories are utilized in the underwriting process for many types of small business financing options, you should not let poor credit scores prevent you from applying. Some working capital providers have higher levels of risk tolerance. But be careful; make sure you fully understand the cost of the capital, have a plan to pay it back, and know the funding company you are working with is operating in your best interests.
Capital providers want to know how you will be using the proceeds so they can assess the risk of their investment and offer you the right-fit solution for your situation.
Small business lenders ask for different documents to support different funding solutions. In general, the less documentation required, the more the funds will cost you. It is in your best interest to provide as much as you can. The following chart illustrates the different types of documentation requested by most lenders and providers for different types of funding solutions.
Minimum Lender Documentation Requirements Chart
Be a Savvy Borrower
It is important to understand your options when applying for small business financing. In general, lower-cost funding is supported by financial and business planning documentation. However, there are many funding options available to small businesses that require less documentation and fund faster than traditional bank loans. The most important aspect of responsible borrowing is being honest and forthright about the need for funds and the financial health of the business. Armed with that information, the experts at Breakout Capital can help you decide what the best funding solution is for your situation.
Breakout Capital is committed to responsible funding. We believe it is better for you to keep your business and grow it responsibly than set it up to fail with insurmountable debt. Please contact us today if you’d like to partner with us.