What's one thing most small businesses don't know about/are surprised by?

Nearly all of the small business owners that we work with at Dealstruck come to us knowing that they need money to grow their businesses, but they often have little idea where to access financing, what kind of products are appropriate for their needs, or how pricing can range so widely across their various options.   

Dealstruck has recently taken the time to build out a chart that compares the pros and cons of the various financing options available to small businesses. This chart allows business owners to see 1) what the application process looks like for each financing option; 2) how much they could potentially receive in financing; and 3) what the ultimate pricing would be for each financing option.

What are the types of loan products I need?

One question that we have been hearing more frequently when a small business owner needs financing is “should I get a term loan or line of credit and why?”

 Term Loan

In its most basic form, a term loan is a lump sum of cash paid back in fixed, equal installments (usually monthly) typically at a fixed rate. Common uses for business term loans are:

Fixed Assets: Most people are familiar with term financing because they have taken term loans to finance the purchase of a fixed asset: i.e. a home, car, or college education. These are assets with a long, useful operating life, and generally involve a one-time expenditure. This rule of thumb generally holds true for businesses as well. 

Having a predictable and manageable payment on a term loan in order to invest in assets with a long operating life is a key to containing your overall financing costs and keeping cash flow as healthy as possible.

Line of Credit 

A revolving line of credit, on the other hand, is ideal for meeting short-term operating expenses. For small business owners, this generally takes the form of paying vendors for inventory, purchasing supplies, making payroll, and other recurring obligations.

Short Term Needs: Used responsibly, a revolving line of credit is a fantastic way to meet short-term cash flow needs, to maintain liquidity, and to keep financing costs low. Ideally, the business owner only draws what is needed on her line to meet operating expenses and then pays down the balance as operating cash flow improves, minimizing the time the outstanding balance accrues interest.

What does it take to get my loan approved?

Have Your Books In Order – Things that may not be obvious to you will jump right off the page for a loan underwriter. Some obvious examples are negative assets or liabilities on the balance sheet and unclassified expenses in the income statement.

Know Your Financials – Be prepared to answer detailed questions about your tax returns and financial statements. Commercial loan underwriters will ask very specific questions about the reasons for changes in your business financial performance, whether those changes are positive or negative.

File Taxes Early – If possible, you should apply for a loan just after the end of your fiscal year. Don’t wait to file your tax return or request an extension – file it as soon as you have the information you need. This allows you to provide the lender with years of tax returns ending with your most recent year-end.

Know What’s on Your Personal Credit Report – Lenders are pretty strict about personal credit, and often require a FICO score of 700 or better (Dealstruck requires a FICO above 600). Make sure you clear collection accounts, charge-offs, and other derogatory items. Keep your revolving credit utilization low and never pay late. 

Key take-away:  Properly acquiring financing takes planning, preparation, and time – it’s a good idea to implement these tips before your business’s financing needs become significant. Not only can these good habits help you get the capital you need, but they can result in a better rate, saving you overhead in the long run.

How much does my loan really cost?

Financing costs come in many forms with many names, and it is important to know how to spot them and how to understand them so that you can compare apples to apples when being given financing options.  Most small business owners understand and expect to pay an Annual Percentage Rate, or APR, because they have seen this pricing in past mortgages, credit card payments and other loans (student loans, etc.).

Unfortunately, in small business lending, many lenders use a number of other pricing methodologies that are a bit off the beaten path.  Some lenders charge based on APR, some based on simple interest, and some based on a factor-rate or buy-rate.  Still other lenders will tack on additional fees to the base interest rate, including application fees, origination fees, guarantee fees, pre-payment penalties and servicing fees.

It is important that the small business borrower ask their lender to explain each of the fees they will be charged, so that they can appropriately compare pricing from one lender to another.