Even if your client says to you that they don’t need funding right now, it is important you instill this principle in their minds: “The best time to apply for a loan is before you need it.”
Believe it or not, this is fact. Think about how it’s better to look for a job while you still have a job, or better to look for a home equity loan when you’re employed than right after you’ve been laid off.
With a small business loan, your clients are in a much better position to secure a loan (and an affordable loan), when their company is in a strong financial position. If they wait until their cash flow is suffering, they’re going to have a harder time getting approved, or harder time getting the rates they want and deserve.
That being said, your client shouldn’t get a loan just because. The key is to help your clients identify potential funding needs early, so together you can apply while their finances are still in tip-top shape, and not when the need presents itself, leaving your client’s finances looking less than perfect. So, what are the warning signs that your client might need funding down the road? Here are the 6 most common ones we see:
- Their industry, or the overall economy, seems to be headed for trouble. It’s no surprise that during the recession, business loans were almost impossible to get. If hard times for the economy are expected—or for your client’s industry in particular—advise them to move quickly to obtain a cash cushion, especially if they have a cash-heavy business.
- They’re having trouble paying bills. If your client has accounts receivable, chances are they find themselves waiting for customers to pay them. However, they have their own bills they need to take care of. If you see your clients are having a harder and harder time meeting expenses while waiting for customers to pay, you should suggest they look at a short-term loan or invoice factoring to help bridge the gap. This way, the problem is averted before their own late payments start hurting their credit.
- You spot early signs of cash flow trouble. Cash flow is one of the biggest factors lenders will consider in your clients’ loan applications. If you know they have future financing needs, but can see their cash flow is headed for trouble, it may be time for them to start that loan application.
- They have a seasonal or cyclical business. If your client’s business has predictable seasons—such as a swim school or a winter coat retailer—they’ll probably need capital to get through the slower times. As you get to know their industry, and can predict the slower times, together you should plan to obtain the necessary business funding ahead of these slow times, when their finances look best.
- You notice the cost of their materials, inventory, etc. is rising. If you notice that your client’s cost for the things they need to operate—whether flour for a bakery or cheese for a pizza parlor—starts to rise, it’s time to take action. Advise them first to cut costs elsewhere, but if that doesn’t seem possible, they may need to obtain funding to help adjust to the increase.
- Their business growing! It’s awesome to see your clients’ businesses grow, but as I’m sure know, growth is difficult to afford. If they don’t have the capital on hand to buy inventory, material, etc. to fulfill orders, move to a bigger location, hire more people, so on, so forth, they’re in trouble. When you see your clients’ businesses start to expand, take a look at their cash flow, and expected to cash flow, to see if they can afford this expansion. If not, they may need to apply for financing.
Keep a pulse on the 6 things above, and if you start to see one of these signs present itself, talk to your clients immediately about getting a small business loan. After all, choosing to move quickly, before their finances take too much of a downturn, could help them get a better interest rate and save hundreds, if not thousands, of dollars.
Want to help your clients find a loan when the time comes? Join the Fundera Advisor Program.