The business owner’s guide to smart borrowing: What lenders want to know
Your business has been growing, and now it’s time to take the next step.
Maybe you are tired of paying the monthly rent for your storefront or business office and want to start putting those monthly payments toward company equity.
Have you outgrown your space, need new equipment, or need access to funds during slow cash flow months?
The piggy bank, couch cushions, and credit card are not the solution. It’s time to seek outside financing. There are many choices and a ton of information to get through. So, what’s next?
Let’s start with these three essential questions that a commercial lender will ask to clarify your funding needs.
How much do you anticipate needing?
The amount you need will depend on the size of the item, your business needs, and the funds you have set aside for purchases or cash flow gaps. Generally, banks are willing to finance 75% of the purchase price for buildings and equipment. If your business meets special requirements, government-supported programs through the Small Business Administration can increase the amount to as much as 90% of the purchase price. Remember to consider sales tax and/or property taxes that also will need to be paid.
Short-term, long-term, or repetitive?
Short-term funds can be for a few months or a few years. Generally, short-term funds are for a one-time situation, such as the purchase to fund an order or purchase of a piece of equipment. Long-term funds can be for 5-25 years and are used for large assets, such as a building or high-value equipment. Repetitive funds can be weekly, monthly, or several times a year. You can use these funds during fluctuating revenue cycles in your business or cover outstanding accounts receivable until paid.
How much can you afford to borrow?
An underwriter will review the ability of the business to repay the loan (and in some situations the business owners’ creditworthiness). You should be prepared to provide the following information, which is used to determine affordability:
• Profit and loss statement
• Business and personal tax returns
• Business and personal balance sheets with all assets and liabilities
• Another factor in the decision making is your projected payback period. The payback period describes how long it takes you to repay the loan while conducting normal operations. For instance, if you are financing receivables, repayment may occur simultaneously as client payments are received. For a building repayment, this can be as long as 25 years.
By being prepared for these questions, you can start the business expansion process with a higher level of confidence. In addition, here are some questions you should ask your lender:
• What does your bank’s approval process look like?
• Once we agree to move forward, how long will it take to get funding?
• What costs should I expect to pay up front?
• What other services do you have that can assist my business?
• Why might my loan get denied?
• What does my post-approval support look like?
While it may sound daunting at first, a local bank with local decision makers can make the process go smoothly. Their commercial lenders know the area and can get to know your business to provide options that work for you and guide you through the process.
• Chris Friis is a senior vice president of commercial lending for Grand Ridge National Bank headquartered in Wheaton. He has more than 35 years of lending expertise and has helped hundreds of small and medium-sized businesses thrive.