The lending environment has improved significantly and a unique combination of two debt financing products is available to entrepreneurs who want to finance a new business or grow their current business. The benefit of debt financing is the owner can access capital but does not have to give up equity or a degree of control of their business.
Preparation Is Key to Success
The goal of lenders is to approve applications that will meet the terms of the repayment in full with no late payments, so preparation and timing are critical components to receiving approval. Follow these five steps to prepare your company for the underwriting process:
1. Focus on your personal credit. All underwriting decisions are affected by your personal credit score. First, make sure everything is accurate, and dispute all derogatory items. Consider hiring a credit advocate and delay submitting your loan or lease application if you have several derogatory items. Request a free copy of your credit score at www.equifax.com or www.experian.com. If you have set up your corporation, check your Secretary of State's (SOS) website to ensure the accuracy of your business listing. Make sure your time in business and the ownership distribution are correct. Remove any owners with bad credit off the listing and write up a separate agreement. All underwriting decisions involve an SOS check.
2. Focus on your business credit. If you are incorporated, Dun & Bradstreet (D&B) has a file on your corporation. Request a copy of your D&B report and check the accuracy of your time in business and ownership information. Consider enrolling in D&B's self-monitoring program to improve your company's Paydex rating by submitting your vendors who have extended your company a credit line such as your lawyer, accountant or cell phone provider.
3. Introduce yourself to your banker. You may need to provide a personal bank reference. You also will need to maintain month-ending balances as high as possible because underwriters check your average balance and month-ending balances. Learn your bank's business debt financing products and when you will be considered a candidate. Most banks will not start lending until you are in business for at least two or three years. Consider local credit unions versus local banks.
4. Create and be prepared to present your business plan. The plan must include your bio and financial projections. The templates you will need are available at no cost at score.org.
5. Be prepared. Preparation is the key to success in financing your business before you move ahead with the financing options. As Benjamin Franklin said, "If you fail to plan, you plan to fail."
A Combination to Finance Your New Business or Expansion
1. Lease to own or fair market value equipment leases: In a typical lease transaction, the security collateral offered to a lessor is the fitness and non-fitness equipment being financed. Club owners can finance strength and cardio equipment, lockers, security systems, computer systems, software, removable flooring, refrigeration equipment, vending machines and signage to build a new club or remodel. Any tangible item needed to run the business can be included in a typical lease, which makes this debt financing instrument useful to preserve cash. The lease payments are a business expense and tax deductible.
If you plan to keep the equipment long term, choose a capital lease so you own the equipment for a $1 or $101 buyout at the end of the lease term. If you are unsure if you want to own the equipment, choose a fair market value (FMV) lease. The end-of-term options for most FMV leases include the options to return the equipment, to rent equipment on a month-to-month basis or to purchase the equipment at the equipment's FMV. Lease documentation fees range from $95 to $495, deposits range from one payment to 20 percent of the total and repayment terms typically range from 12 months up to 60 months.
2. Small Business Administration express working capital loan: This government-backed loan provides working capital ranging from $20,000 up to $150,000 for start-ups and existing businesses. The loan application process requires the use of funds that does not include construction or a business acquisition. However, all other uses are permitted. The application takes approximately 60 days to complete.
For start-up business, the loan can be approved, but the funds will not be paid to the borrower until the location has received a certificate of occupancy to ensure the money is not used for build-out expenses. It is a working capital loan to help ensure that new businesses remain in business by providing the necessary funds to get most businesses through their initial period of loss until they become profitable.
The best aspect of the loan is the terms. The interest rate is the prime lending rate as published in the Wall Street Journal, which is currently 3.25 percent plus a 2.75 percent risk premium charged by the lender, totaling 6 percent. The repayment term is 10 years with no prepayment penalty, and the collateral is the business, not your home.
The Small Business Administration (SBA) program is designed to spread the risk of the loan between the lending bank and the SBA, so there is a better chance of being approved over applying for a traditional bank loan. The SBA will assume a percentage of the risk so that the lending bank only puts at risk a small portion of the loan that the SBA does not guarantee. This is an important element of an SBA loan.