Being a small business owner in the construction industry has its challenges. There will be times when you may need a quick injection of cash. Whether it's to cover expenses or buy new equipment, business owners need options.
You may have heard that it's difficult for a small business to secure a bank loan. In some instances, this is true. Banks often choose to wait until a business has been up and running for several years.
The truth is one in five businesses will fail in the first year. By the fifth year, 50% have closed their doors. These stats don't help the cause of the business owner who's committed to succeeding.
Despite the odds, there are lenders willing to extend credit to small business owners. Continue reading for 10 questions business owners should ask their lender before moving forward with short-term financing.
1. What Is a Working Capital Loan?
Businesses need working capital to keep their doors open. In short, working capital is the difference between the current cash on hand and current liabilities. When liabilities equal or outweigh the cash on hand there is no capital to cover immediate expenses.
With working capital loans, the contractor has access to money that can be used to cover payroll, fund a job, or buy equipment and more.
Not having working capital or access to short-term financing can have a drastic impact on the future of a business. With a working capital loan, there is an opportunity to get the funding needed to cover expenses.
It's important that business owners get a clear picture of their financial health before taking on an additional financial liability.
2. How Much Can I Borrow for Short-Term Financing?
Before considering a short-term loan, you need to understand how much money you need vs. how much money you can borrow.
Your lender will evaluate your financial situation and make the best estimate on how much you can afford to repay. Sometimes this amount may far exceed the amount that's needed.
It's not always a requirement that the borrower has to take the full amount. Some lenders may offer a line of credit. With a credit line, the funds are available but you only take what you need.
If there is a need for additional cash, the borrower can go back and request a withdrawal from the remaining balance. The borrower is only liable for the amount of money they're actually using.
3. What Can the Money Be Used For?
Lenders are not going to lend money just because someone says they need it. Business loans are for the operations of a business. This includes operational costs, material, equipment, labor, waiting on payments between jobs and other business-related expenses.
The money is not to cover personal expenses, but to solve for business cash flow.
When someone applies for a business loan, the lender will ask for proof of your accounts payables and receivables. They may also request copies of your tax refunds for the last two years. A list of assets, like equipment, may also be required. Express Capital Funding will only ask for your bank statements and credit score.
4. What Is the Interest Rate?
Interest rates play a huge part in the cost of a loan. The higher the interest rate, the higher your monthly payment will be. Short-term vs long-term interest rates will have differences.
First, you'll need to know what your credit score is. Although this is a business loan, it will still be primarily based primarily on your business credit history and your personal history if the lender deems it necessary.
Next, you will need to know if you're getting a secured loan or an unsecured loan. If you have a low credit score, your only option may be a secured loan.
Secured loans are considered to be higher risk and will come with a higher interest rate. There may also be a requirement to use personal property such as your home to secure the loan.
The base interest rates are based on several factors including the Federal Reserve. From this point, factors like your credit score and business feasibility will determine the interest rate that will apply to your loan.
5. Are There Pre-Payment Penalties?
Your business may be in need of short term funds to float your cash right now. This doesn't mean that six months from now you won't get that big contract and can pay off the balance of your loan sooner. Usually the short-term loans work when you know you will have a contract started or need the funds to start a new one.
What happens when you want to repay early? For the borrower, it means getting out of debt sooner. It’s important that you find a lender that doesn’t have pre-payment penalties.
Loan documents contain all of the details of your loan. It also outlines the various fees associated with the loan. Before signing, make sure you understand all the terms of your loan.
Some loans may apply a flat exit fee. Others may be in the form of a percentage formula that's based on the length of the loan.
It may seem unfair, but even with the penalty, paying off the loan early may still save you money in the long run.
6. Do I Need Collateral?
When a lender takes a chance on a high-risk borrower, they may require collateral. In the event that you're unable to pay off your loan, the lender will need the means to recoup some or all of their losses.
Collateral is real propertyand could include valuable equipment, a company vehicle, or even fixtures in your office. A business loan could also require cash be held in a deposit account or signing over certificates of deposit.
The lender may also ask that your home or other property becomes collateral on a business loan. Ideally, being a contractor, it’s in your favor to not have to put up collateral. There are lenders, like Express Capital Funding, who do not require collateral.
7. How Soon Will I be Able to Access the Money?
In most cases, when seeking short-term financing, lenders that specialize in these loans can get your money to you within 24 hours. This does not include the time it takes to get approved for the loan.
With the ease of electronic funds transfers, the money can get deposited directly into your business account. Receiving a paper check may mean a hold on all or a part of your funds, once deposited into your bank account.
If you opt for a line of credit, you'll need to discuss with your lender the terms for accessing additional funds.
8. When Is the First Payment Due?
It is important to have a repayment schedule that fits your financial situation. Not all loan terms come with a monthly repayment plan. Some may require daily, weekly, or semi-monthly repayment terms.
Having the first payment due in a matter of days or a week is not uncommon.
Riskier loans will have terms that may not be favorable for the borrower. You may also have to set-up an automatic payment draft. This means the lender will process the payments from your designated account on the days or date the payment is due.
A loan with a monthly payment schedule may be more flexible when it comes to setting a payment date. Be honest with your lender and let them know if you need to pay on the 15th, as opposed to the 1st.
9. What Forms of Payment Do you Accept?
Traditional banks still accept checks and money orders in the mail. Chances are, for a business loan you'll be dealing with an online lender. In these business relationships, your only option is online payments. More than likely, they'll withdraw the payment from your bank account.
Stay in communication with your lender if funds won't be available when the automatic draft is set to process. Non-sufficient funds will not only cost you NSF fees, but it could also cause your loan to go into default and trigger additional fees.
10. Will the Loan Help Rebuild Your Credit
If you're working with a lender that helps business owners with bad credit, make sure your payment history is reported to the three major credit bureaus.
Sometimes you have to take out a risky loan to stay afloat. Make it worth your while by satisfying the terms of the loan so you can improve your business creditworthiness.
Finding a Lender for a Small Business Loan for Contractors
Short-term financing for your business is a great way to get things done. Express Capital Funding understands what it takes to get things done. Our services are available nationwide.
Click here to read more about the best short-term finance options available.