If you’ve decided to start looking for financing opportunities to purchase new equipment, meet payroll during a slow month or quarter, upgrade stores or offices, or buy land, there are important things to consider before choosing and applying for a loan. These five items can help you better understand commercial lending options and identify the financing path that is best for you and your businesses.
Start with the end in mind
Start your funding search by revisiting your business plan and evaluating recent financial statements. This will help you identify the exact goals that would benefit from an injection of funding into your business. A well-written business plan will guide you to what most requires funding, which can help you evaluate available options.
A detailed review of recent financials allows you to see where you will apply funds, your expected return, and how interest and principal will be repaid. It will help you understand exactly what type of financing to apply for and assist you in targeting the right loan amount.
Plan the spend of your loan and forecast the ROI
Once you know how financing will affect your business, you should then evaluate the spend of the new capital. Have a clear understanding of which line items the capital will cover. Your spend should match the total dollar amount of the loan. Capital has a cost and so you do not want to take out more than is necessary. If you do have leftover funds you will need to check it against your forecast and payment records to identify the discrepancies. Based on the nature of these variations you can decide whether you should place the extra capital in reserves for future expenses, or if you should send it back to the lender to pay down your principal more quickly.
In addition, you should measure the return on the investment (ROI) your business will get from the loan. Utilizing your business plan, you should be able to estimate how much net profit you will need monthly in order to pay off the loan. These calculations will help you identify the maximum interest rate you can agree to and how much additional profit the loan will generate for your business.
Evaluate loan types
Get the details on various types of loans. There are large differences in real estate loans, equipment loans, factoring, SBA loans, hard money, and lines of credit. Each one fills a specific role and each will have its own terms and rates.
For example, an asset-based loan will use your assets as collateral for a loan, while a line of credit will use your personal or business credit score to establish credit limits and to determine your interest rate. A line of credit or factoring can help you get the funding you need with more flexibility than a traditional loan and is often the best solution for day to day expenses, such as employee salary or vendor payments. Alternatively, a commercial real estate loan from a major bank will have low rates and a much longer term for repayment.
Ultimately, most businesses should speak to a broker to learn more about the options currently available. They will be able to help you identify the best solutions to achieve your company’s unique objectives.
Shop around for the best lender
Once you’ve identified the financing type that is right for you, there are a few additional things you can do to ensure you get the best loan. Shop around, even if you already think you know the lender you want to work with. Conversations are free, and in the world of commercial financing, a single conversation can often save you tens of thousands of dollars over the life of one loan. In addition, the right lender often becomes a lifetime business relationship, saving you money again and again on each future loan.
Your broker will be able to help you with this process. For example, our team always pitches each client’s financing package to multiple lenders. We then make recommendations based on terms and rates, as well as past experience with the lenders. We handle the tedious work of submitting to a lender after lender and vetting all the options, ultimately ensuring that you end up with the best financing option available in today’s market.