If you’re one of the millions of modern citizens who has decided to strike off on your own and start a business, you may be in need of funding to bring your dreams into reality.
One of the simplest options available to a new entrepreneur is a term loan, either long or short-term, which amounts to a one-time lump sum of cash from a bank. You and your business then repay the loan over time in scheduled installments. In the majority of cases, your payments also service any outstanding fees that were incurred when you established the loan, as well as maintenance fees a bank or institution might charge.
Like any other loan, a small business term loan can be secured or unsecured, and the collateral can come from a variety of sources. If your business has already generated a stockpile of money, or you have some capital to start with, a down payment is the best sort of collateral you can give – you take what you have set aside and acquire a much larger pile of cash to work with.
It’s important to remember that loans are not for everyone. Businesses with a solid operating income and a detailed plan for the future are the kinds that both bankers and individuals want to invest in. Not having either of these things doesn’t make you a bad business owner, but it may make it harder for you to justify asking for a loan. When a company is managed well, it shows in just about every aspect of its operations.
Loan officers learn, over the course of dozens of applicants, what to look for. If you’re disorganized, lacking in clear vision, or fiscally unprepared, their job is to identify that and deny your application. Therefore, it’s good to consider the credit health of your business before seeking any kind of funding.
Just like people, businesses have credit scores. These can be based on a much wider range of information than the credit scores of individuals. Businesses do a lot more types of commerce, generally, than individuals, and can source other types of data to prove their ability to repay a loan. For example, a seasonal business might be able to point to a previous year’s receipts to justify a loan to secure stock for an upcoming busy season. A business might with a good banking relationship can potentially secure a loan with no formal credit check.
Banks want to retain your business. Your banking relationship is one of the most important relationships you will develop as a business, and hopefully by the time you’re interested in flexing your credit, you’ve established a good relationship with the bank you primarily intend to approach.
A long history together is one way to help ensure that a lender will give their blessing to your request, but it’s not necessarily a requirement, but if your business has good relationships with vendors, makes all its credit card payments on time, and doesn’t owe any utilities companies, you likely have a good business credit score.
You can check your business credit score using major services like Experian, as well as services designed specifically for business credit scores.
First of all, you should never seek a business loan just for “general purposes.” If you’re expanding, then you should have a detailed plan, with expenses, detailing the expansion. Remember, this is a lump sum loan – it differs from installment loans, where banks will award you at various milestones based on your progress. Thus, you need to have a complete plan at the time you ask the lender to extend you some cash. But, suppose you’re just trying to get your inventory up. Have you thought of asking the supplier directly for credit? Perhaps another supplier would be willing to start you out with a credit account for switching to them. For material needs, consulting the source directly is always an option.
Suppose you’re not trying to build up your inventory, but instead improve the place you store – your storefront. Instead of seeking a general loan from the bank, it may be more expedient – and more reflective for your credit – if you get a store credit account from a place like Lowe’s or Home Depot.
Here’s a maneuver to consider if you’re in that situation. Get a Lowe’s or Home Depot card, buy the things you need for your improvement project with it, and then apply for a term loan to pay off the debt. This isn’t an unwise decision, as you’re likely to get a better rate from a bank. You can get the items you need without waiting. The only drawback is that while you’re awaiting approval from the bank, you’re going to pay whatever the credit rate is on the store card you get from the home improvement store.
These can range at the same level with personal credit cards, or more than 20%, so it can be a risky move. The upside is that by establishing the store credit card, you further build your company’s creditworthiness, and by seeking a loan to erase the debt, you’re basically getting two good credit histories out of one event. That will come in handy down the road when you seek larger loans.
As we said, it’s possible to get credit through your business without ever asking for a loan. By doing business with various vendors for years, you’ll establish a credit history. The quickest business credit account to establish is a wireless account with a company like Verizon or AT&T. To be considered worthy of credit, you need to make decisions within your means. Your company may be issued a lot of freedom with a company like Verizon. So use it – buy a state-of-the-art phone, tablet, and perhaps a laptop, all of which you should use in your business. Then make your payments in a timely manner.
Look out for other places that might give you a business account, including Sam’s Club. Many of them will report to credit bureaus, which over time will build you a rapport with credit agencies – especially if you follow rule number one, which is to never miss a payment.
If there’s a second rule, it’s to continually push the limits. If you want to be considered a good credit risk, one way to accelerate your profile is to continually buy things you can pay off within 30-60 days. Convert your regular expenses into credit account expenses, and pay them off fast.
The above steps to building a good credit profile will come in handy for a regular business operation, but there will hopefully come a time that you need to expand. Expansion, for nearly all businesses, is the end goal and a high priority. Expansion is not always cheap; it often requires the purchase of a new location, hiring of new employees, and more. During expansion, companies often take on new debts. As an entrepreneur looking to expand your business with a term loan, you have to consider every aspect of your existing business.
First of all, have you considered every aspect for non-debt-based expansion? Does your existing operation offer everything it can?
This is to say: are you currently operating at 100%? Or would your efforts (and money) be better spent improving your current operations, as opposed to growing them into new areas?
When thinking about these questions, it’s important to be honest with yourself. Entrepreneurs like to believe they’re ready for expansion long before they are. In some cases, you could make 40% more without borrowing a dime, or even taking on new clients/attracting new customers.
How you answer questions about your business will depend very much on the type of business you run. If you work online, your options for both finance and expansion are infinitely greater.
For example, long before you consider asking a bank for a term loan, you might look at working capital loans geared toward online businesses. When you approach banks for a loan, you’ll need what amounts to a pitch deck. You will want a vibrant presentation which brings the bankers into your vision for the future of your business. For this part, it may be worth considering hiring a writer or other creative professional to develop something that shows you in the best possible light for you. These services can be contracted online, always for much less than the cost of rejection. If you can include an itemized budget to show your loan officer, your odds of getting approved will increase – the officer can see that you have thought this out.
At the same time, you’re not wholly at the behest of the banker. Remember that your business is doing fine. If you can’t find terms you want, simply walk away, and hope to get them at the next bank, or the next time you come back.
Now that you’ve hopefully taken appropriate steps to build a credit score worth writing home about for your business, and considered all your other credit options, it’s time to start looking for partners in your long-term business goals.
That’s the way to look at your current endeavor: you’re involving banks or other types of lenders as partners in your company’s long-term success and growth.
Think about it, in some cases you might be stuck with the choices you make today for 5 to 30 years. With that in mind, your first application should be with your primary bank, but you should establish a list of other banks and credit unions you might consider doing business with.
If you’ve done some version of the other processes mentioned in this article, and you’ve been with your bank for at least a few years, you’re likely to get an offer from them within a few days. Don’t accept the offer right away. Now you have a base line.
If you’re using any other banks, take that offer to them, and see what they’ll do based on that information. The offer is from the bank that should know you best, but it may not be your best offer. Another bank may want your business enough to offer you a more preferential rate, a lower down payment, or even more capital to work with.
This part very much depends on you and your business, but not every bank is going to generate an offer you like. In some cases, no banks will generate an offer you like, or several banks will generate no offer at all. In cases where the entrepreneur is simply not ready, banks, including your primary bank, may not make an offer at all.
In any of the above cases, it’s important to remain patient. After all, you’re asking to pay a fee for a long time. Servicing a loan is a big commitment, and if you can’t find a bank willing to make it with you, then you might be doing yourself a favor by waiting and trying again later.
In most cases, a loan officer will give you some idea of the things they’d like to see done differently. Often, a bank will counter with an offer for a different amount, which is why your business plan is important – you can decide, with the banker, whether such a counter-offer even makes sense for you.
Whether you get a loan or not does not define whether your business is good or not. Banks authorize loans for different reasons all the time, and they also have their own bills to pay, which dictate how they decide to allocate funds. This is to say that sometimes you may have simply picked a bad time of year to get a loan.
Whatever the case, if you’ve now secured a loan, you need to keep it constantly on your mind. It, too, can function as an asset, something you can take to a new financial institution and potential negotiate with.
A competing bank may be willing to take over your loan and give you a better price through a process called balance transferring. Like all aspects of your business, your company’s debt requires time and attention, and it should not be wasted. Just because your company is capable of handling more debt does not mean you should find reasons to exercise it. In most cases, any potential gains are neutered by the increased burden of servicing the new debt.
Congratulations on your serious plan to expand your company with a term loan from a bank or other financial institution. Now that you know how to get such a term loan, what you do with that knowledge is entirely up to you!