With all the choices available to finance your business, it may seem difficult to pick the best option available.
Unfortunately, there’s not one answer that’s right for every situation.
Every single business owner brings a different set of circumstances to the table. This affects each person’s need for and ability to obtain financing.
While there may not be a simple answer for: “how do I pick the best finance option”, there are some guidelines that will help you reach a decision.
I am going to assume you want the best finance option for your business. A reasonable assumption I hope?
This means you are looking for certain features when considering financing:
- A low-interest-rate
- Favorable loan terms
- Minimal personal exposure
Before you decide…
But before you can make informed decisions about your choices, there is some information you need to collect.
- What is the effective interest rate of the loan? Of course, the higher the interest, the more expensive the loan in the long run.
- What is the duration of the loan? Are there any balloon payments? While it’s good to have the loan spread out, it also means you’ll be paying well into the future… and obligating yourself well into the future.
- What are the minimum payments? What is the repayment schedule? Are you comfortable with the payments… even if money were to get tight at some point in the future?
- Are there any prepayment penalties? Ideally, you do not want any penalties. You want the ability to repay the loan ahead of schedule if it suits your particular situation.
- Are there any late payment fees and penalties? Know what they are and under what circumstances they kick in.
- Is the loan in the name of your business? Are you building credit for your business?
- Will the loan have to be in your name? Or do you personally have to sign and put up a guarantee for it? How will this affect the rest of your personal finances and your credit?
If you are considering different loan products or leases, with different interest rates and payment schedules… here is what to do next.
A Simple Spreadsheet…
- Interest rate
- Repayment options
- Loan fees
- Loan terms
Next… simply compare the different products and consider your options.
If you have a business partner, this is something you should do together. At a minimum, it should be discussed in detail.
If you don’t have a business partner, talk it over with your spouse, a mentor, or a good friend.
First of all, it’s good to have your spouse on board and (ideally) in agreement with what you want to do.
Second, it’s good to get another point of view. This is particularly helpful if you’re trying to make a choice between different finance options.
Often it’s the person that’s removed from the business or practice, who can point out red flags. You, the business owner may be too close to recognize any potential pitfalls.
Once you’ve considered all possibilities and options, it’s time to make your decision.
However, if for some reason you don’t feel good about your options, don’t worry.
You many choose to negotiate the terms of the loan (if the lender is open to it), look for another loan with a different lender or rethink your loan request altogether.
And if you get turned down by one lender remember that there are other lenders in the market. You do have a choice and you do have options.
Your Personal Finances…
In addition to investigating different finance options, there is something else you need to do. Take a look at your personal finances and make any corrections if need be.
Here is how to do that.
Credit score and report:
- Get a copy of your credit report from all three credit bureaus.
- Spend time to go over each report in detail.
- If you notice any errors, make sure they get corrected.
- If there are any outstanding issues, take steps to address them.
- Create a complete picture of your personal financial situation.
- List your major assets (real estate, investments, automobiles, insurance policies, etc.).
- Be comprehensive and account for everything.
- Be prepared to present documentation for your spouse when asked.
- Create a complete listing of all…
- Existing loans (student loan, car loan, etc.).
- Credit card balances.
- Current mortgages.
- Lease obligations.
- Support payments, etc.
Think ahead and prepare the answers to any potential questions you may get from a banker or other lender.
These questions may be about your personal obligations, prospective business income, or about any business experience you may bring to the table.
Make sure you’re prepared for any and all questions that may come your way during the loan process.
Ideally, you’ll have created your business plan. Your business plan will give you peace of mind, knowing that the numbers add up and will support the business.
Your business plan will also communicate to the lender that you have done your homework, that you’re serious.
This may be a tough one…
Ask yourself if you would lend money to yourself based on the information you compiled? Can you honestly say “Yes”, you would make a loan to yourself?
Or is the answer “No”?
If so, what would you need to do, or correct to make a loan to yourself? What adjustments would it take?
Be honest in your assessment.
There is no point in completing the application if you know it’s very likely that you’ll be turned down. If possible, make adjustments ahead of time so you’ll save yourself time and frustration.
When you complete this process, you’ll not only learn a tremendous amount about yourself and your personal financial situation, but you’ll also be prepared for anything!
Here’s what to do next:
- Get copies of your credit report from Experian.com, Transunion.com, and Equifax.com.
- Review all three reports for errors.
- Make corrections if need be.
- Take care of adverse credit listings.
- Then and only then, apply for financing.
It’s time to get busy…
Let us know if you any questions.
By Johanna Hofmann, MBA, author of “Smart Business Planning for Clinicians” and regular contributor to the NPBusiness blog.