How to decide which funding method is best for your business

Business owners face unique challenges and opportunities as they progress through the evolution of their business — and part of that process includes obtaining funding for expansion and growth.

“As you look forward to these opportunities, it’s important to remember that a bank wants to meet with you and understand what your needs are and determine the best method of funding,” says Jason Wells, business banking manager for Central Ohio at U.S. Bank. “Most bankers and relationship managers are looking at every strategy they can to make sure a business thrives.”

Smart Business spoke with Wells about the available funding methods and how to match those to your needs.

What funding methods are available to businesses?

There are generally two. A line of credit, which is for your short-term funding, is available to a business on an annual basis to provide structured working capital. And at some point throughout that year, the business expects to pay back the full amount of the line of credit that’s needed over that time period with interest. It usually takes accounts receivables and inventory to secure these loans.

For long-term capital needs like buying a building or real estate, major equipment purchases, capital improvements, etc., companies usually look at term loans. They are generally secured by inventory, machinery, equipment or real estate.

What are the main factors that determine which method is best for a business?

That’s primarily driven by your use or plans for the funding and the stage of the development that your business is currently in. For the most part, both factors work together.

How can companies best position themselves to get the funding they need?

As a foundation of your business plans, it’s good to develop a solid relationship with the bank. Begin by identifying a banker within the bank that you can work with — generally a business banker — and establish an open line of communication with him or her. You want to talk to that banker on a regular basis about your business needs and plans, so he or she has a strong understanding of your business.

A great way to continue building the relationship is establishing a business checking account or even a business credit card with your current bank. Regularly using and growing your business checking account and repaying a business credit card creates a solid profile for your deposit and repayment history with the bank. This can provide a good platform to launch off of when your business is ready to borrow money from the bank or to pursue some of the other lending opportunities that might be available.

What common issues prevent a business from getting funding from a lender?

The first and most common one is how a business demonstrates its need for funding and the ability to repay a loan. It’s critical to have sound financial preparation and provide the right information to a bank to demonstrate that. A business should always be clear that it generates enough cash flow to be able to pay its expenses, plus pay the loan back and at the end of the day generate a profit as well.

Another issue is a lack of or a shortfall in collateral, which is what the bank uses to offset the risk of lending to a business. The most important thing here is that you, as the business owner, really understand the value of your business, its assets and your personal assets because often the bank will ask you to pledge these to support a loan request.

However, even if your company faces some of these challenges, there are other options. The Small Business Administration (SBA) offers a lot of flexibility to banks with its loan guarantees, where the SBA isn’t directly loaning the funds but provides a guarantee to the bank that the government will repay a portion of the loan if the business owner should default. These loans can provide a business owner longer terms for payment and potentially even lower down payments when a company needs to purchase equipment and real estate.

Whichever funding method you end up taking, it all starts with that relationship with your banker who can steer you through the process.

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