Choosing the Right Commercial Loan For Your Business Needs
January 10, 2021
Most business owners require commercial loans at some point in the lifetime of their business, whether to launch the business, fund an expansion, purchase a new property, or otherwise drive their business growth. When you begin the process of looking for loans, you’ll be inundated with offers from hundreds of lenders who all claim to have the best interests of your company in mind. It can be difficult to sort through them and compare your options without feeling overwhelmed. The next time your business needs a loan, keep these tips in mind.
What Lenders Look For
Your first priority is to make your business as appealing as possible to lenders — 80 percent of business owners who apply for a loan are rejected, and the more loans you qualify for, the more likely you are to find a competitive option.
Before you start the application process, make sure your bookkeeping is in order. A lender’s primary concern is whether you’ll be able to pay the loan back, so they’ll be interested in the collateral you can put forward against the loan, your creditworthiness, your past financial statements, and your tax returns. For small businesses, they might even want to examine your personal finances to determine whether you have a history of unreliable financial practices.
The better organized you are and the more reliable you’ve been at paying back other loans, the more favorable an offer you’ll get from lenders going forward.
What to Look For From Lenders
Once you start to receive offers from lenders, you’ll need to determine which loan is right for your business and your goals. Here’s what to look for:
First, look for experience in the banking and commercial lending industry. Research the reputation of the bank in question (and any underwriters, if applicable), their ratings with the Better Business Bureau and other rating agencies, whether they’re insured with the FDIC, and whether they’ve issued similar loans before.
Follow this with specific questions focused on the bank’s experience in your industry. If your industry is strongly seasonal or sees major rises and falls in revenue that level out over time, your lending needs might be different from those of a business with a more predictable revenue stream. A bank that understands your industry and the financial circumstances in which you operate will offer you a more favorable loan.
A Competitive Product
Examine the details of the loan offer:
- How much will you be paying each month?
- How much will you owe over the course of the loan?
- How much of your payment will go to interest versus the principal of the loan?
- Is there a balloon payment at the end of the loan term?
- Is there a penalty for pre-payment?
- Is the interest rate variable or fixed? If it’s variable, what are the terms by which it might change?
You’ll need to plan your business’ budget around the repayment of the loan, so predictability is important. Some banks also require that you hold a minimum balance in their accounts. This doesn’t necessarily cost your business any extra, but it does tie up cash that you might not have planned for.
A Good Working Relationship
When you sign a business loan, you’re connecting yourself to this lender for years or even decades, so it’s important to consider the working relationship you’ll have with your lender. Look for a personal banker or liaison that’s assigned to your account. If you’re having trouble making payments or want to refinance down the line, you’ll want to talk to someone who knows your business history and has been in contact with you since the beginning.
A Holistic Approach to Your Finances
Anyone can type in numbers from their balance sheets and get a loan, but a good lender will look at much more than just your bottom line. Look for a lender that asks about the reason you need the loan in the first place and the direction you see your business moving in the near- and long-term future. Talk about all your assets, your plans for your business, your history of growth, and any other information about your financial situation you think is relevant.
Talk to First Western Trust
At First Western Trust, we take a holistic approach to every financial plan and portfolio we build for our clients. We’ll examine every aspect of your finances and priorities to build a plan from the ground up, unique to each client, then craft loan terms that can help you grow your business and achieve whatever your goals may be. If you’re ready for a banking partner that’s as invested in the future and success of your business as you are, talk to First Western today.