Debt can be scary for business owners.
There are horror stories of entrepreneurs facing financial hardship and losing their assets overnight.
Occasionally, prominent companies become mired in debt and implode in a matter of weeks.
But not all financing solutions are created equal.
For most business owners and entrepreneurs, securing high-quality financing is less of a necessary evil and more of a valuable tool with significant strategic benefits.
Financing can help businesses bring new products to market, expand a restaurant or retail floor plan or buy advanced and efficient equipment.
Here are steps for gaining and maintaining access to high-quality business and commercial lending.
< PLAN IN ADVANCE
Business owners often wait until an urgent need arises to seek financing. But quality financing takes time to secure.
Lending guaranteed by the federal Small Business Administration, for example, offers lower interest rates and more favorable terms, but also requires the borrowers to provide more documentation than they would have to provide for other loans.
It may take an extended period of time to get the documentation in order, and an urgent business need must be addressed quickly. This may force a business to settle for more expedited and expensive lending solutions, which carry higher interest rates and may impose what the Federal Deposit Insurance Corp. calls unfair and excessive loan terms – commonly called predatory lending – on the borrower.
In fact, unscrupulous lenders count on urgency to peddle this type of product, which can have devastating consequences for a business.
It is common for this type of loan to carry a daily interest rate, such as 1 percent, which seems reasonable to borrowers but conceals an annual rate well over 200 percent.
On the other hand, a commercial line of credit may carry higher rates than a mortgage but much lower rates than a payday loan or personal credit card.
< PRACTICE TIMELY, ACCURATE AND COMPLETE FINANCIAL RECORD KEEPING
Most lenders won’t request audited financial statements. You should still keep the business’ books up to date and ask your controller, bookkeeper or Certified Public Accountant for monthly or quarterly financial reports.
This facilitates the underwriting process and is useful for managing business operations and strategies long-term.
Most CPAs offer a variety of financial statement preparation services, and the lower-scope services are affordable and widely accepted by lenders.
< RUN A CLEAN SHOP
Keep deeds, titles, insurance policies and appraisals for buildings and important equipment in order, carefully maintain equipment and premises and manage inventories and receivables efficiently.
To a bank, good collateral makes a loan less risky, resulting in more favorable terms for the borrower.
< KNOW THE CURRENT SITUATION
Track loans, balances, due dates, annual interest rates and required monthly payments.
This can be done via spreadsheet and will help pinpoint opportunities to refinance, accelerate loan payments and plan for new borrowing.
< CULTIVATE QUALITY BUSINESS RELATIONSHIPS
Start by asking a relationship manager from a reputable community bank for help in assessing your need for short-term borrowing.
Community banks make excellent long-term business partners. Their relationship managers are well-trained and can help businesses understand their needs while recommending quality solutions.
Community banks usually have dedicated experts for each type of lending product. Service is personalized, which encourages trust – the most important business resource of all.
Alex Pabellon is a Certified Public Accountant in Wyomissing, specializing in financial analysis and reporting. He is a member of the Pennsylvania Institute of Certified Public Accountants’ image enhancement committee. He can be reached at [email protected]