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What You Should Be Looking for (or Looking Out for) in a Loan Offer

For most small businesses, the question isn’t whether you will need a loan, the question is when. The business cycle involves ebbs and flows of capital needed to pay bills, draw salary and buy inventory. Without sufficient liquidity, a business may have to cut staff, curtail operations or simply close down. An affordable commercial loan is a lifeline that allows the business to continue to thrive and grow. But not all loan offers are the same. Let’s take a look at what separates the good from the bad.

  1. Size: Most banks scale small business loan offers solely to a company’s credit rating and history. Many a bank loan is turned down or is too small because loan officers have no leeway to look upon each applicant in its entirety. What you want is a loan offer that judges your business holistically, one that values cash flow as much as credit. A good commercial lender will use information — such as RiskLogic scores, industry, years in business and geographic location — to approve loans that bank loan officers can’t or won’t. A good lender should see how you’ve operated in the past and how you’ve used previous loans — did you use them to grow the business or to make foolish purchases.
  2. Speed: Bureaucracy, thy name is bank. If you’ve ever wondered why it takes a bank forever to approve (or disapprove) a small business loan, it’s usually because the people making the decisions reside in corporate headquarters — New York, Charlotte, Hartford, etc. — and have no personal contact with applicants. Applications are often paper-based and sending the information around the country takes time. A better idea is to use quick online application, have a fast-track reference process, deliver pre-approval in seconds and provide funding within 24 to 48 hours.
  3. Cost: Not all lenders charge the same. Merchant cash advances are notoriously expensive. When looking at alternative lenders, pick the one with lowest rates and the best reputation for trustworthiness, such as an A+ rating from the BBB. Choose a lender that charges simple rather than compound interest and which doesn’t penalize you for early repayment.
  4. Convenience: The easiest way to repay a small business loan is to have fixed daily payments automatically taken directly from your account without distracting you from your business. Also, daily fixed payments are easy to budget. A good lender will offer a loan renewal once 40 percent of the original loan’s principle has been repaid. Renewal can result in a lower interest rate and/or higher loan amount.
  5. Credit Enhancement: Guess what – a credit card advance or merchant advance does nothing to build your business’ creditworthiness. That’s another reason to stay away from this type of borrowing.
  6. Human Factors: Does your bank seem cold, remote and have trouble remembering your name. Look for a lender that values human interaction while remaining entirely professional. Courtesy should not be optional. Look for a lender that understands small business because it has roots as a small business.
  7. Honesty: No funny business! Watch out for bait-and-switch tactics, hidden fees, rates that change after the small business loan is made, and pushy loan officers who try to talk you into loan products that are not in your best interest. If a lender requires a large application fee, run the other way. There should be no upfront costs when applying for a loan.
  8. Availability: Lending at many banks simply dried up in 2008. Big business created the crisis, but small businesses took it on the chin. Look for an alternative lender that made loans when banks wouldn’t. They’ll be there the next time Wall Street blows up the economy.

At IOU Financial, we strive to be the best in all eight of these factors. See for yourself — contact us through email or online chat, or call us at 1-866-217-8564. Don’t settle, select!

 

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Understanding How to Manage Capital

Cash is the lifeblood of small businesses, because often they do not have alternate sources of small business funding. A company’s current assets minus its current liabilities are its working capital. Cash and its equivalents — short-term Treasury bills and commercial paper — plus assets that can become cash within a year, such as accounts receivable, inventory and negotiable securities, are current assets. Debt due within a year, accounts payable, taxes payable, wages and salaries payable and other short-term liabilities are current liabilities. It’s up to you to choose how aggressively or conservatively to manage your working capital.

Aggressive Management

The use of short-term credit coupled with minimal spending on current assets characterizes aggressive management of working capital. You are basically operating on a restricted budget, cutting purchases of supplies and inventory to the nub while delaying bill payment for as long as possible. You also aggressively try to collect your A/R. You must not delay interest payments or tax payments. Your creditors will sue and might force you into bankruptcy and liquidation. The Internal Revenue Service takes a very dim view of missed tax payments. The proper use of convenient commercial small business loans, such as those available from IOU Financial, is a vital component in managing your working capital in an aggressive manner.

Conservative Management

At the opposite end of the spectrum, your working capital policy might be conservative: plenty of cash in the bank, inventory levels fully stocked and all bills paid on time. Your supply cabinets are full and employees need not justify a requisition for a new pencil. Typically, a conservative policy has a working capital ratio — that’s current liabilities divided into current assets — of 2 or greater. In other words, for every dollar of current liabilities, you have $2 of current assets. Following this less-risky policy, you’re not anticipating a cash crunch, but you might be getting a lower return, because cash in the bank doesn’t pay much. In effect, to buy some peace of mind, you are sacrificing profits and returns, because you are not leveraging your small business financing. The proper use of credit can help correct a capital management style that is too conservative.

Risk

As you make your working capital policies more aggressive, default and bankruptcy risk increases. For example, if you have little cash on hand and encounter a sudden emergency, you might have to default on an interest payment. Debtors might seize your property or wrestle the company away from you. This is precisely the time to take out a convenient commercial small business loan to get over the rough spots. In a less drastic example, if you skimp on inventory replacement, you’re vulnerable to stock outs, lost sales and alienated customers. Your vendors might stop doing business with you if you string them along for several months before coughing up payment. If you want to float new debt, your deteriorating credit rating will raise your interest rates and make it harder to find new lenders. A commercial loan is the best recourse in these circumstances. Conversely, if your working capital policy is too conservative, you incur opportunity costs by not working your money as hard as possible. This can lower your sales efficiency ratio — working capital divided into sales revenue — which can discourage investors in new debt and equity. Use small business loan proceeds to leverage you operations and increase you return.

Return

An overly aggressive policy increases your return on assets, but hurts your bottom line by lowering your inventory levels and crippling sales. However, the proper use of credit can avoid these problems while maintaining healthy returns. A conservative policy creates some lazy money that doesn’t earn much of a return. The optimal working capital policy lies somewhere between the two extremes. Your goal is to minimize risks while maximizing revenue — experience and experimentation will help you get it right. In just about every situation, consider the use of a commercial lending facility to optimize your return while managing your risks.