What Type of Bank Loan Is Best?
Business Loans
There are several options your business might explore and utilize during the business life cycle to obtain a business loan. As a Duluth CPA we have helped Gwinnett entrepreneurs find, procure, negotiate and place loans with business owners looking to wisely grow their business. Often a business owner will have the need to utilize more than one of these options simultaneously as each vehicle may uniquely serve a distinct need and purpose. Great care and caution should be exercise when evaluating options and your CPA, business banker and your business plan model should be consulted to ensure that each and every financing option is researched and utilized clearly for the needs of the business short term as well as contemplate the long term objectives as well. One of the worst mistakes a business owner can make is to fail to see the long term financing cycles of a business by implementing stop gap measure which offer only a band aid solution to a long term or permanent need.
Lines of Credit
Lines of credit are typically implemented for a specified time period, typically a year and have a maximum amount of borrowing listed. Lines of credit are generally reserved for well-established businesses that have a solid track record of profitably and a substantive net worth. Credit lines are financing options geared towards helping the business owner address the normal ebbs and flows of sales, inventory and receivables. Many business owners have peak periods where the need for cash is much more intensive as operations peak. A landscaping business would be a great example of this as the business gears up to handle peak installation and planting periods. Most business lines of credit are extended and evaluated annually to make sure both the lender as well as the line itself is properly functioning to meet the expanding and contracting needs of a business.
Permanent Financing
When considering long term financing options, it is best to be well versed in the options available before the actual need for cash arises. In fact, it would be advisable to be pre-approved well before any serious shopping and certainly prior to signing any formal commitments, contracts, option agreements, or agreements to purchase. When looking long term and evaluating a variety of financing options, it is even more critical to consider the long-range view and how a certain financing option will allow you to both increase cash flow and economically justify expenditures for larger cash outlays and capital expenditures.
Unless your business’ capital asset decreases, you might never be faced with considering a financial commitment much beyond a five-year loan. However, if you do have such a decision looming either in the future or at present, you will want to be well informed of items you need to consider. For example, if you were to purchase a building for your business, you would want to contemplate:
- If you are building “new”, is the land zoned correctly prior to your purchase?
- Will the building satisfy your business’ operations for an extended period and what will be the financial repercussions if it does not?
- You will want to consider setting up a separate entity, such as an LLC, to buy the business. In this way, your business is protected from legal exposure that the real estate might have and vice versa.
- By setting a new building in an LLC, you also have the added advantage of selling either the real estate or the business without impacting the other.
- As you near retirement, you might consider opting to sell the business while keeping the building providing you and your family with a revenue stream to assist in the golden years of our lives.
- Typically the purchase of real estate or other capital assets will require you to participate in the cost of a loan by paying closing costs and having a “stake” or equity in a given investment. The percentage will typically result in approximately fifteen percent of your own money being placed while eighty five percent of it might be borrowed.
- Primary importance should be given to the “call provisions” of a note. These provisions essentially terminate a loan agreement making the entire unpaid principal balance due and payable. This has historically been a tenant in commercial loans though not often presented in residential loans. Though a commercial loan might reflect in its paperwork that the loan is being amortized (interest charged) as if a loan is over an extended period for example twenty years. However, this is often a provision or call in the loan requiring the entire balance to be paid much sooner which will often necessitate a business owner either paying the principal balance off in full or requiring an entirely new loan and attached closing costs and expenses.
Leases
Often companies selling capital assets will have business relationships with lenders who are able to offer at competitive rates, financing for many fixed asset expenditures. These have the added advantage of convenience as often you are handed from the purchasing to the financing department with nary a ripple of adversity. Also leases often offer the lessee the ability to limit their initial contribution, as leases often require no down payment. An often-overlooked provision is the buyout provision at the end of a lease. These allow a lessee to purchase from the lesser the capital expenditures/item leased at a previously agreed to price, a $1, fair market value or a stated percentage of the original purchase price. Often these clauses are overlooked by a lessee but should not be as an asset might continue to have deeply valued and intrinsic use well after the consummation of the final lease payment. Frequently as well, these provisions of lease agreements and promissory notes are negotiable and may be changed simply by asking.
Selecting a funding vehicle that is not right for your business is tantamount to putting a square peg in a round hole. Navigating through the myriad of options will be a critical part of the long-term viability and success of your business. We assist you in obtaining, reviewing, and comparing your financing options and proposals guiding you towards the best fit for your business. Call us today and we will get started.