UNDERSTAND YOUR OPTIONS FOR SECURING A LOAN
When seeking credit for your business, you should have a clear understanding of what options you have. The type of credit you choose should match the use of the funds, and repayment terms may vary. It's wise to review these carefully when you sit down with your business banker. Together, you can select the type of business loan best suited for your purpose and your resources.
You may have a certain loan amount in mind, but you should ask your banker for thoughts on this. It's important to avoid over-borrowing, and bankers are accustomed to working with business owners to help them determine what they need for various purposes. You should also discuss the repayment period and your ability to repay the business loan.
There are three basic options:
- Short-term loans are made for immediate needs, such as those related to seasonal business demands. For example, a retailer might seek capital to build up inventory for the end-of-year holidays. Repayment is usually tied to cash flow from the resulting sales. A short-term loan can also be used for a small equipment purchase.
- Intermediate-term loans can be used to buy more costly equipment, such as factory machines and company vehicles. Intermediate-term loans are generally repaid in one to three years.
- Long-term financing is appropriate when acquiring larger fixed assets like real estate or expanding a company's existing facilities. It is also used for a company restructuring. For example, you may need long-term financing if you want to purchase another company or buy out other partners in your business.
If you need funding for short-term needs on a regular basis, consider securing a line of credit. This establishes a maximum amount you can borrow on a revolving basis. Once a line of credit is established, you can tap it as needed, just as you would a credit card. A line of credit is typically renewed annually and the interest rate is usually variable.
Another option may be an SBA loan. The U.S. Small Business Administration (SBA) doesn't extend credit, but it guarantees a portion of loans made by banks to small companies. The 7(a) SBA loan program guarantees loans for a variety of business purposes, including working capital and equipment purchases. SBA 504 loans provide long-term, fixed or variable rate financing for major assets such as commercial buildings or equipment.
What your bank may require
You'll need to address some basic questions when you seek a business loan, so be sure your loan request package shows:
- You have a strong personal and business credit history
- You can provide collateral
- Your company has a solid track record and the financial strength to repay the loan
There is still value in meeting with your business banker even if you have some weaknesses in any of the above criteria, as your banker may be able to provide you with an action plan that will get your business on track for obtaining financing in the future.
You may also be asked to guaranty the loan, demonstrating your personal commitment to repay the loan from personal assets if necessary. Read this article for more information on how to put together a compelling request for a loan.
City National Bank offers a range of business loans and lines of credit to help meet your business needs. Contact us to learn how we can help you address short-term cash needs or establish long-term financing options for your company. Call us at (800) 773-7100 or request that a Relationship Manager contact you.