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It’s an exciting milestone when you’re ready to expand your business! You may want to purchase or lease equipment, upgrade furniture and fixtures, or obtain working capital. Whichever it is, you may need financing to realize your expansion plans. But which lending option should you pursue? Some companies may be able to issue stock, while for others a loan may be a better fit. But even then, do you get a conventional or SBA-guaranteed loan? What if you have a collateral shortfall? Choosing the right type of small business financing can mean the difference between reaching your goals, or falling short.
Two ways to meet your need for capital:
Pros and cons of debt and equity financing include:
There are five critical criteria that lenders review for debt financing. These are known as the 5 C’s of credit. While specifics vary among institutions, the 5 C’s provide a framework that helps lenders decide whether or not to offer you a loan or line of credit.
Creditworthiness – your trustworthiness, shown through your track record of paying back creditors. Lenders will review your credit report and credit score – both personal and for your business. They want to see you’ve consistently paid back your debts as agreed and on time. Higher scores on your credit report mean they take on less.
Your business may perform well in four of the 5C's, but lack collateral. In this case, applying for an SBA-backed loan may be your best option. Rather than lending directly to businesses, the SBA sets guidelines for its lending partners. SBA loans provide other attractive benefits, such as lengthy repayment terms (up to 10 years) 3 and competitive interest rates.
It’s important to have a strong business plan that shows how the funds will be used and profits generated for repayment. If you don’t have a business plan and would like to develop one, you can seek help from a Small Business Development Center or SCORE Association chapter. They may also assist you with providing three years of financial projections that lenders will want to review.
If you’d like to explore what debt financing could mean for your business, give us a call. Our experienced lenders will be happy to answer your questions and discuss financing options with you. Or learn more at emprisebank.com/business/borrow/sba-loans