There’s no shortage of financing programs available for small business owners. They are inundated with commercial loan offerings – from email to unsolicited phone calls, snail mail, digital advertisements and more. Banks and non-bank lenders are fighting a never-ending battle to acquire new customers. At the same time, new customers are fighting an ongoing battle to stop the solicitations. Even though all the content and marketing are overwhelming, small businesses need access to capital.
Here are a few tips for determining what type of loan program is right for your business?
Alignment – First, you need to determine exactly how you’ll allocate the funds. Aligning the use of funds with the right program is a crucial component to a stress-free financing.
For example, if you’re purchasing equipment, you want to align the term of the loan with the lifespan of the equipment. The reason is simple: If your loan term extends beyond the lifespan of the equipment, you’re paying for equipment after it’s no longer in use. That just doesn’t make sense.
Flexibility – Next, make sure the option you choose gives you a range of flexibility moving forward. Can you pay off your loan without any penalty? Can you make extra payments towards your loan to shorten your term? Can you access additional financing during the term of your agreement? All of these questions are important. You want control of your future cost and cash flow. If you don’t ask these questions, you might end up in a scenario where your overall costs are higher than expected.
Cost – Determining the trust cost of financing can often be an exhausting exercise. Many programs have fees in addition to the interest rate which impacts your overall cost of borrowing money. Between interest rates, origination fees, early payment penalties, appraisals, and legal expenses, capital costs can rise quicker than you’d expect. While you’re going through a process with a lender, you want to make sure to request a document that outlines all of the fees associated with your loan. Add up all the fees and interest, divide it by your loan amount and get your true cost of funds.
Process – All business owners have limited time, especially for things that are non-revenue generating. While speed and efficiency are important, make sure you don’t sacrifice cost and flexibility for ease of use. Although a simple process is attractive, try and plan ahead so you can manage through a more intensive process to get the best possible rates and terms. We believe that extra work for a better loan program that you will have for years to come is much more important than a few less documents to close a deal.
Do the math! If you had two options, which would you choose?
Option A: One week of pain and paperwork for three years of happiness.
Option B: One easy day of paperwork for three years of pain.
We think the answer is clear. Spend time doing diligence on your lending partner. Spend time getting the best program. And then you can back to spending time growing your business.