Small business owner's financial questions posed and answered by a small business advocate.
Editor's note: This is a first in a series of common questions gathered from small business owners and respective answers by a finance expert.
Small business growth and expansion requires capital. How to access it requires his is the first of a series of common questions and answers
I need some working capital for my business expansion. Should I apply for a line of credit or a term loan or both?
A, If your business is less than 2 years old you are not ready for a line of credit. A line of credit underwriting relies on historical gross revenue and if your business is new, you probably will not qualify for a line of credit from a bank.
You will have to consider a term loan which is determined by three major factors:
#1 Your personal credit and how much outstanding debt do you have. This includes both personal and corporate debt obligations.
#2 Realistic cash flow projections that reflect your ability to pay debt service and grow your business
#3 The lender is familiar with and likes your line of business.
The writer's caution:
Many businesses will be approached by on-line lenders offering "quick" access to capital. Beware!
The cost of these "quick" loans that have a very simple application process, can be dangerous to both the success of your business and your personal credit score. The offering rates may appear to be low since interest is paid daily.
Daily interest payments do impact the availability of cash to grow your business, and the interest rate, calculated annually, is always double digit. Repaying the debt is difficult and obtaining additional debt at market rates is impossible until the payday loan is paid off.
If your personal credit is good (680 or higher), many lender both banks and on line lenders, will consider a business term loan at a single digit interest rate.
In many cases the SBA guarantees a major portion of the loan, insuring the lender of repayment. The SBA guarantee reduces the lender’s risk. SBA guaranteed loans are much less expensive than payday loans. And some banks may offer conventional term loans to qualified customers in good standing.
Next page- Question 2: How long does the Loan Application Process Take?
About the author
Marjorie Weber has been educating entrepreneurs and guiding them in their search for capital for the past 16 years: combining business training programs with one-on-one mentoring. Marj is currently a financial advisor for Florida SBDC at FIU. She was Chair of SCORE Miami Dade from 2010 to 2014. She also serves as an advisor to the Goldman Sachs 10,000 Small Business Program and the SBA Emerging Leaders Program and provides training for Veterans seeking an entrepreneurial path upon retirement from the service. She has facilitated workshops under the auspices of Miami Bayside Foundation, Little Haiti Cultural Center and .local banks. She commenced her career as a real estate investment banker in New York and Miami..She uses these long term relationships to assist her clients in accessing capital. She knows both the process and the people and has assisted in providing financing for hundreds of businesses in Miami Dade.