Choosing the Right Financing Solutions for Your Business Needs

It’s long been and still is the American dream to own your own business, and, when you do, you will need deposit accounts, cash management options, and it’s likely that you will need financing. Financing can be a solution not only for the purchase of a new business, but for buying equipment, vehicles, or inventory, funding receivables, purchasing a building, or doing build-outs and improvements on an already owned property. Unless you are fortunate enough to have a pot of money available, you will need to take some steps to obtain financing.

If and when the time comes that you need funding outside of your own cash, there are a number of options available and it’s important to talk with the right team to help determine the best structure for you. Your team should include your banker, your CPA, your attorney, and any outside advisors that have helped you while your business has grown.

There are a number of traditional financing options:

Your savings: The money that you contribute to your new business will likely represent your equity in the business. For example, if you contribute $5,000, you will have a $5,000 ownership interest in your business.

Friends and family: The advantage of obtaining equity investments from family and friends is that you can usually do so without giving up too much control. Conversely, it is quite possible that a friend or relative may, because of the relationship, feel more comfortable about imposing his or her opinions as to how the business should be run. You should therefore keep the relationship formal to avoid any misunderstandings, and you should choose carefully the relatives or friends from whom you solicit funds.

Line of credit: A line of credit should always be used as a short-term solution that is fully paid back to your lender within 1 year. If you are frontloading the costs of a new project and won’t get paid until the project is complete, a line of credit is a great option for you. You can continue to operate your business, pay your employees, and take on additional jobs while waiting for your receivables. Once paid, you can then take that money and pay down your line of credit.

Term loan: Term loans are most frequently used to purchase equipment and vehicles, or for permanent working capital. Most important to note is that there is a start date and end date to your loan. You will likely have a term of 3 or 5 years to pay back your debt, and sometimes even 7 or 10 years. Having a longer payback period, as opposed to a short-term line of credit, allows you to have a more reasonable monthly payment.

Commercial Mortgage: This financing solution is used to purchase a new building or recapture equity on an existing building. A typical loan-to-value (LTV) is 75%, however, there are other options available that may increase your LTV to up to 90%, allowing you to come up with less money up front. A typical term for a commercial mortgage is 20 years but you’ll want to discuss specifics with your banker as changes can be made.

There are also other external and creative options that may be available to you. For example, non-retirement investment accounts could be used as collateral to secure a line of credit or term loan. This is out of the box thinking, and something your team should be suggesting to you considering as an option. Depending on each individualized situation, your banker can provide you with options that would best fit your needs, along with education and advice throughout your business life-cycle.

Choosing the right solutions to help with all of your business needs is also critical. Banks offer a wide range of deposit products and services; be sure it’s the right match for you. Those that are full-service look at your entire financial situation, help analyze your financial health, and provide comprehensive solutions. This would include online services, payroll, merchant services, cash management- such as remote deposit capture (RDC), automated-clearing house (ACH), on-line wire transfer options, and Positive Pay, retirement options for you and your employees, and overall financial planning.

Take the time up front to find a partner that has the experience and knowledge to help you succeed.

Call our Commercial Lending Team today at (585) 419-0670 to discuss your financing options, or visit us online for more information.