Here’s How Short-Term Lenders Use Your Bank Statements—and Why You Need to Know

If you’re a small business owner who needs fast capital, short-term lenders might be the answer to your prayers. Unlike traditional banks, short-term lenders typically ask for minimal documentation when you apply for a loan, making the application process much easier and quicker.

But if you own a seasonal business whose income goes through extreme ups and downs throughout the year, there’s one hitch to the otherwise straightforward application process. Most short-term lenders ask for the most recent 3 months’ worth of bank statements as part of your loan application. However, they average those 3 months out and use that number to determine your small business’s annual revenue.

This can cause you some problems if your average doesn’t reflect your actual revenue. For example, suppose you own a retail business and the winter holidays are your busiest season. If you apply for a loan in July, when your sales are slow, you’ll have to share your business bank statements for April, May and June—not your best sales months. As a result, your bank statement will show a lower income, averaging out to an annual income that doesn’t accurately represent your business.

How can you get around this problem?

Getting the best possible loan for your seasonal business from short-term lenders requires some strategizing. If you’ve been in business for a while, you’ll have the benefit of previous years’ financial statements to review. You can see which three-month period has the highest average sales, and base your application off of that.

For instance, that retail business probably does most of its sales in October, November and December, or in November, December and January. If that’s the case, that business owner would get the best results by applying for a business loan in January or February, so that he or she could share the year’s best bank statements with the lender.

If your seasonal business is a startup, applying for a business loan will be a bit more of a guessing game. However, you should still be able to estimate which months will be your most profitable, and time your loan application to fit that timeframe.

Here are some other tips to boost your chances of successfully getting a loan for your seasonal business from a short-term lender:

• Because timing is so important, plan well in advance so you don’t bypass the best season to apply for your loan.
• Lenders will be looking not only at your average balance, but also at any overdrafts or nonsufficient funds (NSF) charges. Their goal is to ensure you have enough money to repay the loan. Try to maintain a daily ending balance of at least 10% of your gross deposits.
• Lenders will also look for any unexplained deposits—in other words, cash deposits. This can be a red flag that you’re padding your business income. If you deposit the cash in the bank, you need to also claim it on your business’s tax returns.
• Recurring payments can tell lenders your business has debts that could affect your ability to repay the loan. Make sure lenders know what these payments are for.
• Look for a loan whose payment varies based on a percentage of your daily or monthly sales. This makes it easier to get through income ups and downs.
• Don’t exaggerate your revenues to the point where you get a bigger loan than you can actually handle. Create sales projections for the entire year, figure out how much the loan will cost you, and make sure that even your most conservative sales estimates enable you to comfortably pay the loan back.

The post Here’s How Short-Term Lenders Use Your Bank Statements—and Why You Need to Know appeared first on Fundera Ledger.

from Fundera Ledger https://www.fundera.com/blog/2016/01/19/short-term-lenders/