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Making your small business assets work for you

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Lea Sperle joined Citizens Bank in 1998 and has nearly 20 years of banking experience. With a background in both residential and commercial lending, she enjoys helping her clients achieve their financial goals, be it the purchase of a new home or the startup of a new company. Lea is a graduate of UW–Milwaukee, and enjoys volunteering in the community through a variety of events.

When your business has a funding need, the question of whether to utilize business assets or to borrow funds will undoubtedly arise. To successfully make these decisions, several general principles exist to ensure you’re utilizing business assets wisely and efficiently.

What are the guidelines for borrowing vs. using capital?

If using existing funds won’t affect current cash flow or put the business in a position of financial hardship, it’s typically a better decision to make use of available cash. When making this decision, it’s important to understand if and how drawing on this cash affects the debt service coverage ratio—that is, the available cash on hand, dollar for dollar, to pay debts and expenses going out. As long as the business can maintain at least a 1:1 ratio of available cash to debts, using cash is a wise choice. However, if leveraging available assets would take the debt service coverage ratio below 1:1, we recommend exploring lending options.

What are items to consider when selecting the right lending option?

If using existing capital is not an option, businesses can consider other borrowing solutions, including commercial bank loans and SBA loans. Each of these financing options has different loan terms, repayment methods, interest rates, and time to funding. For this reason, the specific needs of the business will determine the best lending option.

Commercial lending benefits

With flexible interest rates, easy repayment terms and maximum credit availability, commercial bank loans allow bankers to help companies secure funds for business development.

Commercial bank loan incentives:

  • Carry some of the lowest interest rates of all loan options, enabling business owners to access critical funding while maintaining lower overhead costs.
  • Available in long terms, allowing funds to be paid back slowly, decreasing the potential for default.
  • Can be used for very large sums, commonly allowing startup costs to be obtained with a single loan.

SBA loan benefits

Small Business Administration (SBA) loans – which are available in a variety of options for both term and line of credit—are loans backed by government-sponsored guarantees. SBA loans issued through financial institutions offer businesses that may not otherwise qualify for conventional bank loans access to the credit their businesses need to grow.

SBA loan incentives:

  • Easier qualification process than conventional loans.
  • Suitable for all business purposes, including purchasing inventory or commercial real estate relating to the business and refinancing other business debts.
  • Structured to require lower down payments and allow for longer repayment terms.
  • Competitive interest rates to help grow the business affordably.

What are the guidelines for good borrowing practices?

Maintaining an understanding of your financial situation provides confidence as lenders review loan requests. Following are tips for a successful outcome:

  • Legitimate business purpose – One of the first questions commercial lenders will ask is, “What are you looking to purchase or finance?” The practicality of the purchase will be assessed in terms of strength, opportunity and risk. Because every loan carries a risk, be prepared to explain the goals and objectives for your loan, as this will help the lender determine if a commercial loan is the right fit.
  • Be realistic – Consider how much money is actually needed to grow the business, and how much money the business can realistically afford to pay back each month. Creating a well thought out budget supported by financial projections will help ensure you request an accurate sum for your lending needs.
  • Consider character – Lenders aren’t looking for the “perfect” borrower – because there aren’t many of them. Lenders want to make sure they’re borrowing to business owners who will make good on the business debts. Your personal credit score is how lenders judge your reliability and, while it’s always best to have an excellent credit score, today’s lending environment is more open to subpar credit ratings—instead focusing on the strength of your business and your character rather than on your credit score.
  • Lay the foundation – Beginning the lending process is as easy as reaching out to your local community bank. It’s important to build a relationship with your lender before you need a loan, as initial conversations help the lender understand your commitment and your business. It’s also critical to gather appropriate documentation for your request, including financial statements, projections and a copy of your personal credit report.

It all starts with the relationship

Your relationship with lenders can last many years, so it’s important to be comfortable with them, their business values and the other financial services they offer. One thing that distinguishes local community banks from other financial institutions is the customer-focused approach to commercial lending. Whether you’re a small business, or mid- to large-sized business, by choosing your local community bank for your commercial lending needs, you will benefit from local decision-making, personalized service and expertise.

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