Dawn Scocco, Vice President and Portfolio Manager, Provident Bank
One of the benefits of operating a successful business is the ability to take advantage of more lending opportunities to help fund your growing business. While the Small Business Administration provides several loan options to new and growing businesses, they are government guaranteed and may be more time consuming and costly than a traditional loan. Many financial institutions offer small business loans to profitable businesses that have operated for more than three years. Here are five tips on how to take advantage of a small business loan:
- Don’t allow your tax preparer to be overly aggressive with tax planning. To be able to obtain a traditional commercial loan from your bank, your business must be profitable. While most accountants look for ways to lower your taxable income, if they are too aggressive and your business reports a loss, then you will be unable to obtain traditional financing. The primary source of repayment for any commercial loan is cash flow from your business’ operations. If you do not demonstrate the ability to repay the loan in full, then you will not qualify.
- Don’t take all of the profits out of your company in salary and distributions. The bank does not want to be the only party investing capital into your business. By leaving some of the profit in the company each year, you will build your company’s net worth and it shows the bank that you are as invested in growing your company as you are asking the bank to be, if they become your lender. Further, should your business hit a rough patch, the funds left in the company become a cushion of working capital that allows your company to continue operating during downturns in the economy.
- Apply for the correct type of loan. Many business owners will apply for a line of credit because their monthly payments are usually interest only with principal due at maturity. However, these loans are only meant for short term financing needs and usually require an annual clean up where your balance must be paid down to zero for 30 consecutive days. An example of a short term financing need is if you use the proceeds from the line to purchase inventory which will have to be paid for before you sell it, you use your line of credit to fund the purchase. Once the inventory is sold, the money from the sale will be used to cover your overhead and pay down the line of credit. If you are using the proceeds of the loan for a longer term investment such as the purchase of equipment or vehicles, the appropriate type of loan is a term loan. While the monthly payment is higher, because it includes principal, the term is much longer.
- Be prepared to provide collateral that matches the type of loan you are requesting. A line of credit is traditionally collateralized by accounts receivable and inventory. If you have a cash business and you are using the line of credit to fund overhead when business is slow, you will need to pledge a different type of collateral. Banks will usually ask you to pledge your home in these cases. If you are applying for a term loan, then the collateral is usually the equipment or vehicle being purchased. However, if the term loan is for leasehold improvements and you are not the owner of the building, then again, the bank may require a lien on your home. Collateral is the secondary source of repayment, so while it is important, it does not replace the bank’s reliance on your business cash flow.
- Your personal credit score matters. Character is important to the bank and your credit score is the bank’s best measurement to look at when deciding on whether to approve your loan request. You will most likely be required to personally guaranty your loan. A person with a good credit score (Over 680) whose credit report reflects timely payments with no history of delinquency, judgments or liens, is more likely to repay the bank’s loan on time than someone who has a low credit score and has been delinquent on their personal debts. If a person shows a low percentage of availability under their revolving credit, then this person appears to be overextended and may need to use the business cash flow to increase their salary and take future profits out of the business and therefore be unable to repay the bank’s loan
By planning ahead and keeping these tips in mind, you should be able to find the financing you need to take your business to the next level. Community-focused banks, like Provident, look for these lending opportunities so that they can see firsthand how their loans will help their own community.
With over 20 years of experience in finance and commercial banking, Dawn Scocco has worked in all facets of commercial lending – including Small Business, Middle Market, Mid-Corporate and Business Banking. She has provided loans that range from a $1,500 overdraft facility to a $2 billion syndicated loan transaction. In her current role as a Portfolio Manager within Provident Bank’s Business Banking Group, Dawn focuses on working with small to mid-size companies to grow and sustain their businesses by providing working capital, equipment and real estate financing as well as meet their depository, cash management, and merchant service needs. Dawn’s greatest strengths lies in her ability to listen to her clients to understand their needs and her commitment to meeting those needs. When she’s not working, Dawn enjoys outdoor adventures with her husband and two sons.