Business Financing Options
By Janet Carbary
When it’s time to grow your business, or you have an unexpected financial need, the financial options available to a business owner or administrator can feel overwhelming or confusing.
Gain clarity on the options, discover what option might be best for your practice, and learn how to prepare to get the financing you need.
QUESTIONS TO ASK LENDERS
Here are some questions you can ask yourself to see if you are ready for financing:
- How much do you need? Remember how much you need may be different from how much you want. You should crunch some numbers to figure out how much you need to borrow to meet your goal. If the bank offers you more, should you take it?
- How quickly do you need it? This will determine what type of financing you go after to pursue. Online financing can be obtained quickly, while a bank or loan from the US Small Business Administration may take a month or longer.
- What are my credit scores? Lenders will often look at both business and personal credit scores. It is important to know what those numbers are as you look for financing. You can find your business’s credit score for free through Nav (Nav.com/free-scores). Something negative on your credit is not necessarily going to stop the loan but you need to be ready to address it with the lender.
- How long has my company been in business? This is a typical question with lenders who recognize that younger businesses are higher risk.
- How much revenue does my business make? Make sure you know your numbers and know how to explain them. The lender may also want to look at the business’s cash flow.
- How quickly do you plan on paying it back? Loans are typically categorized as short term (less than 24 months), medium term (2-5 years), and long-term (5+ years).
- What does a personal guarantee mean? If you sign as the personal guarantor, the lender can try to collect from your personal income and assets if the business defaults on the loan. Lenders do prefer a personal guarantee by the owners of the business.
- Do I need collateral? Some lenders prefer to make loans that are secured by real estate, equipment, or your accounts receivables.
Having the answers to these questions will allow you to be prepared when meeting with a lender. It will also help you determine what type of financing may be the best fit for you and your practice.
DECIDING ON FINANCING
Once you have determined it is time to apply for financing, here are a few more things to consider to assist you in determining which type of loan, or financing, is the best option for your current situation.
- Business credit cards. These will require the owner’s personal guarantee. If your business does not have much of a credit history, they can help build a solid credit history for your company.
- Cash advance. These funds would be lent based on expected cash income. These are short-term arrangements and payments can be taken from future cash flow on a daily or weekly basis.
- Receivable financing. Funds are advanced against unpaid receivables with a portion advanced upfront and the rest when the funds are collected. This is often referred to as factoring.
- Line of credit. This makes a specific amount available to the business to be used as needed. Lines of credit are usually renewed every 12 months and are usually obtained through banks or online lenders.
- Microloan. These small loans are usually less than $50,000 and may be offered through Community Development Financial Institutions (CDFs) or the SBA microloan program.
- SBA loan. The SBA guarantees loans offered through banks and other financial institutions. Terms can be attractive, with low interest rates and favorable repayment terms. Your banker can help you apply for the right SBA loan for you.
- Term loan. This is a specific amount of money borrowed for a specific period of time. Interest and payments are often fixed.
Unlike consumer loans, lenders are not required to disclose an annual percentage rate (APR), which is used to compare costs. That is why it is important to consider the interest rate, fees, and how long it will take to repay the debt to understand the total cost. You can use one of the many free small business loan calculators available online to compare the offers you receive.
Having all the documents gathered before the application process will make it a much easier process.
The personal items you will need to apply for a loan are:
- your updated personal credit score and report
- most recent personal tax return
- a government issued photo ID.
From the business you will need:
- credit scores
- two years of business tax returns (one may work)
- six months of bank statements
- profit & loss statements from your accountant,
- your business plan
- financial projections
- proof of ownership
- vendor references
Once you have these items gathered, you can complete the application and make an appointment with a lender to review all the paperwork you’ve put together. Forming a relationship with the lender is invaluable as they can become great resources to you as the company grows which will help with any future funding decisions. After all of this is complete, all that’s left is to deposit the money in the bank and start meeting the growing needs of your business. Happy financing!
Janet Carbary is CFO for Integrated Rehabilitation Group in Mill Creek, Washington. She can be reached at Janet.Carbary@irgpt.com.