Small Business Lending: Why Using a Loan for Its Intended Purpose Matters
by Claire Parker, Staples® Contributing Writer
In life, death and taxes are certainties. In business, its finding a loan.
Whether funding equipment upgrades, supplementing employee salaries, or making real estate investments, getting a loan is a rite of passage business owners will likely do not once, but many times.
It might seem to you that all money spends the same. But the bank wants to know exactly how you plan to use the funds so they can recommend the right kind of financing.
You have to understand, a lender is trying to determine how big of a risk it would be to lend you money, says Erik Larson, an SEO specialist for South Jordan, UTbased Lendio, which recently launched a financing program with Staples to help small business owners find alternative loan options. Which is why an important aspect of the lending process is explaining what the borrowed money is going toward, and then actually using the money for that specific purpose.
So before you talk to a lender, use the advice of these small business coaches, owners and bankers to get the loan you need, and for the reasons you need it.
Have a Plan for Your Business
Dr. Angela Lindenmuth, owner and chiropractor at White Rose Family Chiropractic, LLC, in York, PA, recently secured a mortgage loan from her local bank in order to buy a permanent location for her practice. A few years prior she used a line of credit to purchase office equipment. She says these two sources of funding were available only when she set clear goals and completed them, and made sure her lender understood her ultimate business plan.
Banks need to feel confident that you will pay back any money they lend you, Lindenmuth says. So have a clear understanding of what you are trying to do with your business and how it will generate income.
"Before you go to a lender, you need to be prepared. Find out what documents theyre going to need, and know the answers to the questions theyre going to have," advises Larson.
Have a Plan for Your Loan
Along with your business plan, bring a detailed document that includes how you determined the amount you need, how the money will be used, and how that activity makes your business more sustainable. This gives the bank confidence you can repay the loan. Depending on the lender, you may also need to bring additional financial records.
Many alternative lenders dont require all of this documentation, but most responsible lenders at least walk you through the cost of the loan to help you compare that cost to the benefits your business will receive from the loan, according to Craig Coleman, CEO and founder of ForwardLine, a Woodland Hills, CAbased merchant lender.
Borrowing for the sake of borrowing doesnt help your business, Coleman warns. He says having the important analysis of comparing the cost of the loan to the benefits that the loan will provide your business is a necessary step. Its not responsible borrowing to take on debt if youre not sure how youre going to use it.
Read the Fine Print
There are serious consequences if you dont use the loan for its original purpose.
Loan terms vary from lender to lender, but in many cases you could face a penalty if the loan is used for a reason other than its original intention. So dont think you can skim off the top of a real estate loan to pay for extra inventory you need this month.
Most, if not all, lending contracts contain a clause that basically says if you don't use the capital for its intended purpose, your loan could be due in full within 48 hours, Larson cautions. So read the fine print carefully before signing, and make sure anyone using these funds in your company understands the requirements fully.
These steps will help you get the small business loan you need, and not extra headaches you dont.