Consider these tips when seeking financing for your business.
Choosing a loan for your business can be confusing and time-consuming, especially if you’re considering it for the first time. If you’re looking to obtain financing anytime soon, you may want to consider the following questions to get the best deal possible.
How Much Can I Borrow?
Your banker can get you the quickest answer on your debt capacity, since they are familiar with your business. If you’re working with a lender for the first time, determining your debt-carrying capacity can be very involved, but a quick ballpark estimate is to assume that for every $1 you have, you can raise somewhere between $4 and $9 in debt. This amount will be lower with traditional private bank financing, and higher with secondary gap financing.
So, if you have $10,000 in unencumbered cash, you might be able to leverage as much as $90,000 of debt financing by combining primary and secondary sources of debt financing. These secondary gap financing sources are available through your city, county, state and/or the Small Business Administration, and are structured to make capital more accessible to small businesses.
Where Can I Get the Best Financing Terms?
You will receive the best financing, in terms of cost and payments, when you couple private bank financing with secondary gap financing. These secondary sources are flexible and can be used for a variety of purposes (from working capital to real estate), have low fixed-interest rates (three to four percent), and can adjust the payback period of a loan based on the unique financing needs of your business.
Private banks, on the other hand, provide financing instruments for specific purposes and limit their loan term and amount in accordance with the life and value of the asset being financed. It’s not uncommon for a bank to provide separate loans to the same business—one for working capital, such as a line of credit based on 75 percent of your accounts receivable over one year, and another to finance real estate over a 20-year period, up to 80 percent of the property’s appraised value. As with private bank financing, secondary sources have their funding limits as well, based on job creation ($15,000 to $65,000 per job), a portion of the total project cost (33 to 50 percent), up to a maximum threshold ($150,000 to $5 million). Using both private and secondary financing will ultimately reduce your monthly principal and interest payments—so you can free up cash for operations.
How Can I Reduce My Financing Costs?
The cost of financing your project includes the interest rate along with closing costs (legal, appraisals, environmental) and fees (origination, closing, servicing, etc.). You can reduce your cost by shopping around and selecting a lender (or lenders) that you’re comfortable with and offers the lowest rates. Ask area lenders for their commercial loan rate sheet—or better yet, their term sheet, which provides details on the costs and conditions of their loan based on your specific project.
The interest rate on small business loans in 2018 have averaged four to six percent, just slightly above Peoria County and City of Peoria loan rates, at three and four percent, respectively. And when the prime interest rate goes up, the City and County rate will continue to remain the same, creating more savings. In short, you can lower your overall interest rate, fees and closing costs by blending private financing with secondary gap financing available locally through the City of Peoria, Peoria County and Illinois Business Financial Services.
How Long Will it Take to Approve my Loan?
You should expect to receive financing within 30 to 60 days from the time you’ve submitted the required paperwork. The approval schedule will vary and depend on many factors, including the loan amount requested, the use of funds, the collateral to be secured, and the borrower’s capacity to sustain or generate revenue, just to name a few. A lender will need to collect a variety of information about you, your business, and the market and industry you serve in order to determine how the loan will be paid back and the associated risk.
The best thing you can do to expedite the loan approval process is to organize all your paperwork, update your financials monthly, and prepare realistic scenarios of how your business will perform in the future. While it will be a challenge to go through this exercise, the loan review process is a valuable learning experience. It will not only help you get organized; more importantly, it will help you get a better handle on your business.
The important point to know is that you have many options. In the end, you should seek financing that delivers the lowest cost, provides for quick and sure approval, and offers the most flexible terms. So choose your financing wisely, and remember to seek the advice of a banker and a secondary gap financing lender to get the best deal possible. iBi
Cesar Suarez is senior development specialist and administers the City of Peoria’s Revolving Loan Fund program. He can be reached at (309) 494-8645.