Whether you are looking to start a wholesale business, grow your operation, expand into new markets, or add new products, the ability to get a loan can help you to accomplish everything you need to build your company. Wholesale distributors play an important role in the retail supply chain, so it is critical for you to have capital.
Heavy equipment, warehouse space, and inventory requirements are just a few of the big expenses wholesalers face. While incoming cash flows can certainly help fund day-to-day operations, if you want to expand your business in any way, a loan is just what you need. But before you sign on the dotted line, Forbes has some common business loan requirements you should be aware of when preparing to apply:
Business & Personal Credit Scores
When you submit a business loan application, a lender will typically review both your personal and business credit scores to assess the risk you pose. While a bad personal credit score can hurt your chances of approval, a good personal credit score can improve your loan approval odds and help you secure a lower interest rate.
Annual Business Revenue & Profit
Lenders often have minimum annual revenue requirements, and some have minimum monthly revenue requirements, too. To confirm your business’ earnings, a lender will request your business’ bank statements and income tax returns.
Time in Business
Businesses that have been in operation for longer have a greater chance of loan approval. While minimum time requirements vary, it is common for traditional lenders to require you to have at least two years in business. Online lenders often require applicants to be in business for at least six months to a year.
Some lenders will review your debt-to-income (DTI) ratio to determine whether you can afford to take on additional debt. Your DTI ratio weighs your monthly debt against your gross income, and this can be calculated by dividing your monthly debt by your gross income. For example, if your monthly debt is $10,000 and the gross income is $20,000, your DTI ratio is 50% ($10,000/$20,000).
Debt-Service Coverage Ratio
Another ratio some lenders consider is the debt-service coverage ratio (DSCR), which measures your business’ annual net operating income in relation to its total annual debt. To calculate your DSCR, divide your business’ EBITDA by its total annual debt. For instance, if EBITDA is $100,000 and its total annual debt (including the business loan you are applying for) is $80,000, the DSCR is 1.25 ($100,000/$80,000).
Collateral for Secured Loans
Lenders offer both unsecured and secured business loans. If you apply for a secured loan, lenders require you to pledge collateral — something of value, such as accounts receivable or real estate — that they can seize if you fail to repay the loan.
The industry you operate in also plays a factor in whether you qualify for a loan since each industry has a different risk factor and some lenders are restricted from working with certain industries, such as adult entertainment businesses, gambling businesses, and not-for-profit businesses. Be sure to contact the lender to check your industry’s eligibility before you apply.
Some lenders may require you to share your business plan, especially if you are a startup, which may include the following:
- Financial projections
- Purpose of using the funds
- Industry outlook
- Competitive analysis
Where to Get a Loan
Now that you know roughly what you need in order to apply for a loan, you need to find a lender. While banks may seem like an easy go-to, they can easily deny your loan based on poor credit, high risk, and other factors. If you are in need of capital soon or are a startup with very little financial history, there are plenty of other places that wholesalers can apply for a business loan.
According to Merchant Maverick, one alternative is through the Small Business Administration. They have a Microloans program that is suitable for new businesses and startups:
- Borrowing Amount: $500 – $50,000
- Term Lengths: Up to 6 years
- Interest Rates: 6.5% – 13%
- Borrowing Fees: Possible fees from the loan issuer
- Personal Guarantee: Guarantee required from anybody who owns at least 20% of the business
- Collateral: Collateral normally is required, but it depends on the lender
- Down Payment:
- No down payment for most businesses
- Possible 20% down payment for startups
- Possible 10% down payment for a business acquisition loan
Merchant cash advances from eBusiness Funding are also easy to obtain if your business is small or new. Unlike bank loans, your credit card/invoice sales decide if you qualify — credit scores, business plans, and collateral will not hurt your chances.
- Borrowing Amount: $5,000 – $500,000. The amount is based off of your revenue potential
- Term Lengths: The repayment terms are based on the money you bring in, so they will discuss this with you when you qualify
- Interest Rates: Non-compounding
- Personal Guarantee: They boast a 95% approval rate
Another financing option to cover startup expenses is a personal loan. If you have a high credit score, you may be able to obtain a personal loan with low rates that can be used to fund your business. Approval for a personal loan will be based on your personal credit score and history, as well as your personal income.
If you have a low credit score, you can jump online to try peer-to-peer lending options, crowdfunding, or loans from friends or family members. Make sure that any loan agreement is on paper and signed by all parties involved.
No matter what you are looking to secure a business loan for, let these tips be your guide to securing the funding you need in order to expand or start your company. Once you have a business loan, be sure to check out WholesaleCentral.com to put your brand name out there in front of more retailers.