Throughout the ages, even successful individuals have often considered debt a burden that can weigh heavy on one’s personal and business life. Such was the case with Mark Twain – the highest paid writer in America in 1894 – whose lack of financial savvy and subsequent world tour to repay his debts was recently chronicled in Richard Zack’s book The Last Laugh. Twain went on to leave a sizable estate, but the prospect of owing money caused him many sleepless nights.
As a business owner, you’ve most likely found yourself in the same situation when you think of getting a business loan. With ownership comes responsibility and accountability, and while both are part and parcel of building a successful enterprise, they usually also account for the occasional 3 a.m. self-doubt session!
One of the many stressful decisions a business owner faces is when and where to borrow money for an expansion, renovation, acquisition or any number of other opportunities that can keep an enterprise on the success track. To keep growing, you’ll need and want to deploy capital at some point. Securing the right type of funding at a competitive rate, and for the right reason, will be a step that you should take with an experienced commercial lending partner or small business banking partner – not your Uncle Joe (no matter how wise he is.)
Horror stories about over leveraging your business, while they certainly exist, aren’t the norm. Success stories about owners who financed growth, transformation or expansion through getting a business loan, are by far more common – including many businesses right here in western Connecticut, such as the Danbury Square Box Company. Using the best business loans wisely can often be the difference between stagnation and success.
Whether you’re faced with aging information technology, are considering a competitor acquisition or simply want to be prepared to take advantage of the countless opportunities that cross your path every day, here are three top considerations when evaluating your business capital requirements for small business financing. There are others – for an analysis of options that are right for your needs, as well as a review of your financials to ensure cash flow and other metrics are in line with collateral requirements – consult with your business banker first. Or, visit a website such as the Small Business Administration (SBA) to get a feel for the types of financing available to business owners.
1. A business line of credit is cheap insurance
Most established businesses already have an existing borrowing relationship for small business financing, whether it’s for equipment purchases, office structure financing or a letter of credit facility that allows you to engage in international trade. If you don’t, here’s why you should think about establishing that relationship quickly – perhaps in the form of a business line of credit.
Think of a line of credit as cheap insurance – it often costs virtually nothing with the exception of minimal set-up fees, and if you don’t use it there is no interest expense. Typically, there’s no legal counsel required to establish the credit line and limits can be tailored to your individual needs by your financial institution or small business banking partner.
Secure a line of credit so you can jump on opportunity – or even for the proverbial rainy day. New business owners or start-ups often wonder whether a line of credit is necessary to build up their business credit profiles. If that’s your sole reason for filling out an application, you might want to save that application fee. Whether you’re borrowing from a mutual bank or other source, in today’s business lending environment cash flow is indeed King. The ability to demonstrate income is more important than any other credit worthiness indicator, including collateral.
2. Credit cards can be risky – or rewarding
Financing that piece of manufacturing equipment or next season’s inventory on your credit card and making the minimum monthly payment is definitely not a good idea. Generally, carrying any kind of small business financing-related balance on credit cards and forking over big interest payments doesn’t make sense. In fact, it’s a huge risk that can absolutely backfire and cost you dearly.
Are there any times at all that you should consider charging purchases for your business? The answer is “Yes.” Purchasing new office furniture with your credit card and paying off the total amount at the end of the billing period is not only free money (exclusive of your card’s annual fee), but in most cases will net you rewards from the card issuer, such as points for cash back or miles that you can use to reduce the cost of business travel.
You might also consider using credit cards to pay your vendors. Let’s face it, the days of discounts for early payments are gone – at least until rates rise significantly. Until then, credit-card-based vendor payments can reduce the risk of fraud while continuing to add to your reward point balance. By the way, we can help you identify which of your vendors accept credit cards for payment.
3. A commercial bank loan isn’t always right
Let’s say your new business is still in concept, beta or even early start-up stage. Can you qualify for a traditional business loan? Unless you can prove that all-important revenue stream, regulatory changes have made getting a business loan tough, no matter how brilliant your business plan.
The good news is that there are more resources than ever at your disposal, including entities such as Connecticut Innovations, formed by the Connecticut Legislature in 1989 specifically to help promising tech start-ups. Or, for entrepreneurs living in select Connecticut communities, try the Community Economic Development Fund, which Union Savings Bank supports. The SBA is also an excellent first-stop for anyone researching business loans.
If you’re still unsure about which direction to take, give one of our Solutions Teams a call. They’re here to listen and help you engineer the right strategy, including pointing you in the right direction for securing the capital you need for small business financing to fund your success..
By Peter Maher
Executive Vice President, Chief Lending Officer, Union Savings Bank