Taking out a business loan is common, but business owners should think of using financing to grow instead of just as a last-resort fallback. Loans may be put toward business operating costs, equipment purchases, real estate, or cash flow management.
When to borrow: planning ahead vs. emergency lending
There are some specific signals that indicate the need for proactive borrowing, the first of which is growth opportunities. When your business secures new contracts or expansion opportunities, it’s important you have upfront working capital to meet these demands successfully. The same is true when a business anticipates capital expenditures or a seasonal rush; it should borrow money early to prepare for these expenses and position itself for more profitability.
Reactive borrowing is when a company takes a loan out without a plan, whether it’s done impulsively or out of desperation. High-cost, short-term debt can cause a sudden spike in monthly expenses, creating cash flow disruption and taking capital away from daily operations. When a business waits until cash flow has dried up and then has no time to prepare, they can’t negotiate or improve their credit score. This can potentially lead to higher interest rates, hidden fees or prepayment penalties.
Choosing the right product for strategic needs
When choosing the form of business lending right for your business, you first need to determine the purpose of the loan. Short-term working capital is used to fund short-term needs, such as temporary cash flow gaps, daily operational expenses and seasonal inventory fluctuations. Long-term investments that take years to pay off need long-term financing. These include expansion, acquisition of major equipment and the purchase of commercial property.
Some examples of short-term financing options include:
- Business line of credit: Ideal for a company that wants ongoing access to cash. The borrower can draw money, repay and draw again as much as they like.
- Merchant cash advance (MCA): Used by businesses that need fast funding, as it gives them an immediate one-time payment in exchange for a percentage of their future sales.
- Invoice factoring: A good choice for a company that is waiting on slow-paying clients, as the lender pays the outstanding invoice to the business (minus a percentage or fee) and receives the customer’s payment themselves.
If you’re thinking about long-term financing, consider:
- Business term loans: Gives businesses predicable, fixed payments each month, typically lasting between three and 25 years.
- Equipment financing loan: A business loan specially used to purchase machinery, vehicles or computers, which then serve as collateral until they’re fully paid off.
- SBA loans: Backed by the U.S. Small Business Administration, SBA loans are preferred by businesses looking to significantly expand their space. They have the lowest interest rates and the longest terms, lasting up to 25 years.
Preparing now: financials, credit, and documentation
When requesting a loan, you must be prepared to provide essential records and documents. These may include profit and loss (P&L) statements that summarize your revenues and expenses over a specific period, balance sheets that lay out your assets, liabilities and equity at a specific point in time, cash-flow projections that show how much you expect to pay and receive over the next year and past tax returns that verify the income you’ve reported is accurate.
Before applying for a loan, you should ensure your business has a strong business credit profile and display of owner creditworthiness. First, work to boost your credit score by keeping your card balances low and paying all bills on time. This goes for both business and personal credit cards, as lenders will evaluate both credit histories.
You should also maintain healthy cash flow and update your financial statements to display the most accurate and up-to-date information. Another good tip is to craft a detailed business plan that tells the lender exactly how you plan to use the loan.
To complete the loan application process as efficiently as possible, first gather all identification and financial documents required by the institution you’ve chosen. Next, you’ll submit the application form, authorize credit checks and pay any necessary fees. Most importantly, if you’re asked for missing or clarifying documents, be sure to provide them immediately.
Obtaining a loan from CB&T
At CB&T, we pride ourselves on providing service that’s personalized to your business lending needs. We do this by offering a wide range of loans, from term loans and lines of credit to equipment financing and international banking.
When you meet with our bankers, you’ll see we’re committed to doing more than just financing your company. We’ll work with you to establish measurable objectives such as return on investment (ROI), revenue lift and margin improvement, as well as support you as you navigate our online services.
Visit our site or your local CB&T branch to schedule an appointment today.