Smart Borrowing: Is Your Business Ready for a Loan? 

Navigating the world of business lending can be overwhelming, especially for small business owners trying to figure out the right move for their growth. Drawing on years of experience in lending and underwriting, this guide offers straightforward insights and practical advice to help you understand when a loan makes sense and how to prepare for the process with confidence. 

Recognizing When Growth Calls for Financing 

When is it the right time to seek a loan for your business? It’s important to know that a loan should not be used to sustain daily operations. Your business’s money from selling your products or services should cover these ongoing costs. However, there are strategic times when a loan can be the right tool to support growth or help bridge temporary financial gaps. 

When your business has reached capacity, a loan can help cover the initial or one-time costs of expanding. Here’s how a loan can make a difference: 

• Buying new equipment or vehicles: Upgrading equipment can increase production capacity. 

• Hiring additional employees: Bringing on new staff can help meet growing demand. 

• Purchasing a large quantity of inventory: Bulk purchasing can reduce costs and ensure enough stock to meet customer orders. 

Imagine you run a small bakery. You currently have a consumer oven and a handheld mixer, which limits the number of orders you can fulfill at once. You also buy all your ingredients individually at a local grocery store, which means higher costs and frequent trips. This setup might be enough for now, but it restricts your ability to grow. 

With a loan, you could purchase a commercial oven and mixer, increasing your production. You could hire an additional employee to help with orders, allowing you to multitask and take on more business. With increased production and sales, you could also afford to buy ingredients in bulk from suppliers at a lower cost. As your business becomes more efficient and profitable, repaying the loan becomes manageable. 

Bridging the Gap Between Accounts Receivable & Accounts Payable

Many small businesses face a gap between accounts receivable (A/R) and accounts payable (A/P)—when you have to pay your vendors before your customers pay you. This can make it difficult to keep up with costs. A loan, particularly a revolving line of credit (RLOC), can help manage this cash flow gap. 

Revolving Line of Credit (RLOC): An RLOC is typically used to bridge gaps in cash flow and is meant for working capital needs. This means it’s used for things like: 

• • Paying wages 

• • Buying inventory 

• • Paying your vendors 

An RLOC is not meant for long-term investments like: 

• • Buying equipment 

• • Purchasing vehicles 

• • Making down payments on real estate or equipment 

An RLOC works similarly to a credit card but often comes with lower interest rates. You only pay interest on the amount you actually use. For example, if you have a $100,000 RLOC but only draw $10,000, you only pay interest on the $10,000, not the entire $100,000. You can draw from the line, repay it, and then draw again as needed. This means that the $100,000 is available to you repeatedly, as long as you repay the borrowed amount. 

It’s expected that the RLOC will “revolve,” meaning that the balance goes up and down over time and occasionally rests at $0, indicating that you’ve repaid the full amount before borrowing again. 

• Term Loan: If you need a one-time cash injection to help bridge this gap, a term loan can provide that support until client payments come in. 

Behind the Scenes of Underwriting:

We carefully examine your business’s financial health to determine if a loan will benefit you. For a RLOC, we look at your ability to manage and revolve the line (using it when needed and paying it down). For a term loan, we assess whether it can sustainably bridge your cash flow gap without putting your finances at risk. 

What Is the Loan Process Like? 

Applying for a loan might feel overwhelming; it is not uncommon for the loan process to take 4-6 weeks to complete, and approval is not guaranteed. However, understanding the process can make it more manageable. Here’s what to expect at Business Impact NW: 

• Gathering Your Documents: You will need to provide: 
  • 2 years of business tax returns 
  • 2 years of personal tax returns 
  • Year-end and year-to-date financials (Profit & Loss statements and balance sheets) 
  • A business debt schedule (a list of existing business loans and their details) 

• Initial Review and Discussion: After applying, a loan officer will reach out to you within 24-48 hours to get to know you, your business, and its needs. They’ll go over your application, discuss collateral options, and guide you through any additional forms required by Business Impact NW. 
• Underwriting Process: Our underwriting team reviews your financials to ensure you have sufficient income to repay the loan. If your current income isn’t enough, we assess whether the loan can help reduce costs or increase income, making repayment feasible. 

Behind the Scenes of Underwriting:

We conduct a thorough evaluation of your financial health. This involves analyzing revenue streams, profitability, and how the loan can impact your operations. We also ensure that the loan aligns with your business goals, offering a realistic path for growth. 

• Approval and Loan Commitment: If approved, you’ll receive a commitment letter detailing the loan amount, interest rate, monthly payment, and collateral. You’ll have a deadline to accept and sign the loan documents. 
• Final Steps: Once the documents are signed, our documentation team prepares the loan documents. Your loan officer will schedule a meeting to go over these documents, ensuring you understand all terms before the loan is disbursed. 

How Business Impact NW Can Assist: We’re here to support you throughout this process. Our team offers clear communication at every step, answering your questions and helping you gather the necessary documents. We strive to make the lending process as transparent and straightforward as possible, allowing you to focus on growing your business. 

 

Making Lending Work for Your Business 

Taking a loan is a significant decision. As lenders, our role is to ensure that the loan will support your business’s growth or stability. By understanding what lenders look for and preparing your business accordingly, you can set yourself up for successful financing. 

 

Ready to take the next step? Whether you’re exploring loan options or preparing for the lending process, Business Impact NW can help. Visit our ‘About Our Loans’ page for loan specifics or schedule a consultation with our lending team to discuss your business needs. 

Not quite ready to borrow? Explore our free resources to get loan-ready. Check out our Capital Readiness Program for free classes on financial management and credit or connect with a loan preparation coach for personalized guidance through every step of the lending process.