Celtic Bank Blog

Three Steps to Choosing the Perfect Working Capital Loan for Your Business

Knowing which loan to accept can be tricky. What type of loan should you get? And where from? What should you be asking your lender so you don’t have any unwelcome surprises during the application process? We’ve broken the process down into three stages to help you ask the right questions and get the right loan: choosing your loan, choosing your lender, and choosing to accept your loan offer.

 

CHOOSING YOUR WORKING CAPITAL LOAN

 

Finding the right loan starts with asking the right questions. Here are some things to ask yourself as you consider getting your next working capital loan:

What do I want to do with the money? Certain loans have restrictions on how you can use the money. For example, SBA loans can be used to help with renovation and construction projects, but the type of project will determine which SBA loan programs you can or can’t use. Private lenders may also specialize in funding only certain industries. Check with your loan provider to see what regulations they have on your loan use before applying.

How much money will I need? Depending on the size of your loan, some options will work better than others. For small, quick needs, a simple line of credit for overdrafts may work. But for larger, more long-term funding, you’ll definitely want to look at something more like an SBA loan.

How soon do I need it? Keep in mind that each loan type comes with its own process for funding. Some can be processed and funded within days, others may take a week or more. 

How long would it take for me to make the money to pay it off? Could I handle a short repayment plan if necessary? Many working capital loans come with a shorter repayment period. Other repayment terms may be longer, but carry steep interest rates. Either way, before you get your loan, do the math and see how quickly you’re realistically able to repay your loan. If everything has to go perfectly for you to make your payments, it’s probably not your best option.

 

CHOOSING THE RIGHT LENDER

 

When it comes to financing, sometimes which lender you choose can be just as important as the loan you decide on. Finding the right lender will make a big difference on the products you have to choose from, the interest and fees you pay, and your overall borrowing experience.

Take time to find the best lender for your needs. As you look around for the right lender, start by asking the right questions:

Is this a broker, or a lender? A broker finds you a lender; a lender gives you the money. While brokers can help you connect with the right lender more quickly, you also need to look into any changes in the process or extra fees that may occur when using this broker. You don’t want the third party broker to slow down communication between you and the lender or increase your costs.

What kind of fees are charged by this lender? Speaking of cost, let’s talk about fees. The fees you have when getting a loan will vary depending on the lender and type of loan. We’ve compiled a list of fees to look for when meeting with a lender, giving you a better idea of the total price of your loan:

Origination Fee:

This is an application and approval fee. Depending on the lender, you may be charged a flat fee or a percentage of the loan. Sometimes this is included in the total loan amount.

Service or Processing Fee:

This is the fee that covers the management of the loan. It includes the cost of customer service, billing, and other loan administration. Check with your lender to see if service fees are billed monthly or just paid all upfront.

Prepayment Fee:

This fee protects lenders from loss of interest revenue when a borrower pays a debt off early. Some, but not all, loans are subject to prepayment fees.

Referral Fee:

If you go through a broker or other lending platform, you may be required to pay a referral fee. Often, your bank or lender will pay the broker or platform for you. But they may pass that cost onto you in other ways. Check with your lender to see what the policy is for paying broker fees.

Packaging Fee:

Some lender platforms will charge a packaging fee for compiling, preparing, and reviewing your loan application before sending it to a lender. This could also include fees for credit reports or UCC (Uniform Commercial Code) searches that are run as part of the qualification process.

SBA Guarantee Fee:

The SBA charges this fee for all 7(a) loans over $150,000 that it guarantees. The lender pays the fee, but they can pass that fee onto you. This fee is a percentage of the money guaranteed by the SBA, not the loan total itself.

Non-sufficient Funds Fee:

A flat fee charged when you don’t have enough in the bank to make the payment. Usually ranges from $15-35.

Late Payment Fee:

A flat or percentage fee when a payment is not made on-time.

Wire Transfer Fee:

A flat fee charged when wire transfers are used to make a payment. Usually $10-20.

Payment by Check Fee:

May be charged when a loan payment is made by check. Usually a flat fee between $10-20.

The lender’s average APR can give you a general idea of how much you should expect to be paying in fees. It provides an estimate of your total repayment cost—including interest and fees.

Will they offer me enough to cover what I need? Some lenders, while fast, have low caps on what they’re able to loan borrowers. You want to find a lender that can meet both your time and your funding requirements.

Are they trustworthy? What is their reputation? Taking money from just anywhere is never a good idea. Before you hand over all your sensitive personal and financial information, make sure you know your lender is credible. Turn to experts in the field, and look for accreditations by trusted, unbiased parties. One example is the SBA, which labels certain premium lenders as “SBA Preferred Lenders.” This helps you know that the lender is experienced, qualified, fast, and fair in their lending practices.

 

ACCEPTING YOUR LOAN OFFER

 

There are a few final details you’ll want to iron out before you sign. As you prepare to meet with your lender and go over the loan agreement, have these questions ready to go:

Do you require collateral or liens on the loan? Collateral is any asset that a borrower offers as security for a loan. It can include a home, commercial real estate and equipment, or things like accounts receivable invoices and bank savings accounts. A lien is the legal enforcement that allows a lender to take possession of these assets should the borrower fail to pay. There are pros and cons of using collateral and liens, as seen in the following chart:

 

Pros Cons
  • Lower interest rate and APR
  • Longer repayment plan
  • Smaller loan payment
  • Larger loan amounts available
  • Can make it easier to meet qualification standards
  • Longer application and payment process
  • Lose pledged assets in the event of default
  • Less flexible than an unsecured loan

 

What about a personal guarantee? A personal guarantee binds a business owner to pay back a loan personally if the business cannot. This is often required of businesses that are newer and without previous credit history. Personal guarantees protect lenders against loss by making sure that, whether the business makes it or not, the money will be repaid.

For borrowers, a personal guarantee is a two-edged sword. On one hand, it enables businesses to qualify for loans they otherwise would not. On the other hand, it means the business owner becomes personally responsible for the loan. So his or her credit and assets, and those of a spouse, if applicable, can be taken in the case of failure to repay.

Have you worked with other businesses in my industry before? Each industry has its own set of needs and challenges. Although not required, generally lenders with lending experience in your field will offer you the most fair-priced and informed options.

What’s the repayment schedule? Depending on your loan, you could be looking at annual, semi-annual, monthly, weekly, or even daily payments. Merchant cash advance loans are repaid with each credit card transaction. Knowing what to expect can help you make sure you keep up with the payment schedule—especially if you tend to have slow seasons.

What’s the total cost of this loan going to look like? While the exact amount varies depending on your diligence in paying on-time (or making extra payments), your loan officer can give you an estimate of what the total cost of the loan will be—principal, interest, fees, and all.

Do you have past customers I could speak with? Chances are, you’re quick to ask your friends, family, or Yelp community for recommendations before trying out a new restaurant. With borrowing large amounts of money—especially for your business—it’s a good idea to do the same. Ask about the process, responsiveness, customer service, and overall experience from customers who have used this lender before. Depending on your repayment schedule, you could be working with this lender for a while. Make sure it’s a good fit before diving in.

For more tips about choosing a working capital loan, applying, and getting approved, check out our new ebook, A Smart Business Owner’s Guide to Working Capital Loans, coming soon!  

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