Before You Borrow: What to Look for in Business Financing

The new year for many business owners means securing additional capital to put into motion the plans that were made at the conclusion of last year. Whether that capital or financing is short-term or long, a line of credit or term loan, below are a few things you should pay attention to:

Trust Goes Both Ways

As with any other relationship, trust is a key component of any financial relationship with a lender. The application process is not just you building trust with your lender to secure funding, it is also a time for you to determine your trust in your lender. With a solid foundation, it will be easier to navigate the loan term should your business run into any adversity, or parlay your existing loan into future funding when your business grows.

Understanding the Terms

There are many ways to structure business financing, and all come with their own advantages and drawbacks. Longer repayment periods mean lower monthly payments that may fit into your monthly cashflow, but also mean you will pay more in interest over the life of the loan. Lines of credit allow you to only pay interest on monies at the time you need them, but also require enough inflow of cash to make large paydowns periodically. Lower interest rates may require additional collateral you may not have anticipated pledging, or may require a longer timeline to go from application to receipt of funds. Finding the right balance for you and your business is not always an easy get, and you should be prepared to ask questions.

What Covenants Really Mean

Every loan will come with paperwork to sign – make sure that you understand what you are signing before you sign it. Any lender should be able to walk you through your loan documents. In particular, it is important to review any additional requirements (or “covenants”) the lender may have ongoing throughout the loan – do you need to provide annual financial information? Are you pledging to maintain certain insurances or certifications? Does the lender need to be informed if you take on additional debt or change anything about your business after the loan begins?

Planning for the “What Ifs”

Similarly, it is a very good thing to make sure you understand what happens when things don’t go perfectly to plan. If you miss a scheduled payment, do you have a grace period to make the payment up? What is the fee if you don’t? If something pledged as collateral (equipment, vehicle, real estate) becomes compromised, what typically happens?

Knowing How the Loan Ends

While it may seem far off, it is also helpful to know what happens at the end of a loan. What documents will you receive after the final payment? What actions do you take vs your lender?

Securing capital doesn’t have to feel like a leap of faith. If you’re thinking about a small business loan, but you want help understanding your options, Business Impact NW offers loans and support that meet businesses where they are. Whether you’re in analysis paralysis over your next move or ready to dive in, our team is here to help you think it through.

If you’re in Idaho and want to strengthen your financial readiness before applying, check out our upcoming Navigating Numbers: Business Financial Readiness Made Simple sessions this March.