February, 2018
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Is Your Business Over-Leveraging or Under-Leveraging Debt?
It’s a simple, but important question.
Leveraging Your Company Is A Balancing Act.
There are many important variables and tools that go into building a business. People, product, service levels, marketing messaging, culture, financing – just to name a few. In the middle of the ever-complex challenge of operating a business the question of over-leveraging or under-leveraging the business can be a difficult one to answer.
In some cases, it’s possible to restructure and refinance debts in order to free-up cash flows. But for others, over-leveraging their cash flows or collateral means there are few alternatives to slowing growth, turning away business, and paying down debts out of existing working capital. Even worse, some companies are borrowing the maximum that they can in terms of cash flows and credit worthiness. Even if they wanted to, borrowing more money and using it to expand or grow is not an option.
Some substantially under-leveraged companies are in the completely opposite situation. If they wanted to inject capital onto their balance sheet there are plenty of opportunities to do so. And in some cases, the fact that they haven’t is restricting growth.
Questions about leveraging your business:
If you are under-leveraging your business, there are a few key questions to ask yourself:
1. How much money could you borrow, at what rates, and over what terms? If you “maximize leverage,” taking full advantage of the company’s cash flows and assets, how much money could you obtain?
2. If you obtained this money, what you would do with the cash to grow your business?
3. Do the potential benefits of using borrowed money to grow your business outweigh the risks?
Leveraging yourself to the hilt is not the goal of this exercise. It’s to help you determine the acceptable level of risk for obtaining your growth goals. Learning to make decisions like a Chief Financial Officer would for a large company is to start managing your business from the balance sheet instead of solely from the income statement. We all know that the income statement is important, it’s where we can track sales and monitor our expenses and profitability margins. However, you track your wealth on a balance sheet, and the equity growth in your business is the financial health measure.
Borrowing Money:
If you can borrow more money, and have a good idea what you can do with it — come up with three scenarios:
1. What is the worst that would happen? If the investment is a disaster and doesn’t generate incremental revenue – what would happen to your cash flows as you pay off the debt?
2. The other side of the coin is the home run scenario. If everything worked out perfectly, how much incremental profit would you generate, and how quickly could you pay down the debt?
3. What is the “most likely scenario”? It’s most likely something in the middle between home-run success and abject failure.
Sometimes working through this exercise can unlock whole new ways to think about aggressively growing your business.
Whether you are seeking financing to grow your revenues to the next level, or you are just starting, North Texas Loan Advisors, LLC has the professional experience and expertise to help you successfully determine the level of leverage you need in your business.
6 Questions to Ask Your Loan Broker
Your Loan Broker Has The Answers.
Your professional loan broker can offer you advice based on experience. Their informed opinions and valuable market knowledge can be essential when preparing your business loan application. Whether you are looking for a U.S. Small Business Administration guaranteed loan or a commercial loan you deserve an advisor who provides one-on-one business counseling and guidance. When you meet with an experienced loan broker, he or she will ask plenty of questions: How big of a business loan? What’s your credit score? Is your business profitable? etc.. However, you need to ask the loan broker some important questions too!
6 Questions To Ask Your Loan Broker:
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Can I get financing for my business startup/expansion idea?
A loan broker can help you with research and loan structuring to help your business ideas thrive. They have databases and professional insights to help you in obtaining the best type of financing for your venture. Additionally, they can help you determine if there is a lender that is a good match for you.
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How much capital should I borrow?
Business owners wrestling with questions of how to determine the right loan amount to request are wondering: How much can they qualify for? How much money will accomplish their goals? And how much is too much? Some business owners underestimate the amount of money they need to borrow because of cost concerns. Others are exuberant and believe they can borrow more than what most lenders would be willing to extend in credit. Loan brokers can help business owners realistically estimate how much capital they need. Additionally, they can help lenders understand the loan amount you are requesting by justifying it with a professional loan proposal.
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Am I prepared to approach a lender?
A business plan alone isn’t enough when you approach a lender to ask for a loan. You will need to put together a loan package, and a professional loan broker can help you do that. Loan package presentations can include everything from the initial presentation requesting the loan from a lender to the professional packaging that is sent to the Small Business Administration.
A basic loan package should include:
– A business plan, with all of the appropriate business financials and projections.
– Personal financial information, including tax returns and credit reporting.
– Legal documents (i.e. articles of incorporation, partnership agreement, licenses, leases, franchise agreements)
– A budget describing the spending of loan proceeds.
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What type of loan is best for my business?
A loan broker can help you obtain the right type of loan based on your business needs. Determining the correct loan structure, whether you need a term loan for long-term borrowing or a revolving line of credit for short-term borrowing, or whether or not you need a commercial loan or an SBA loan, can be a difficult task. Structuring the correct type of loan and using the correct lending vehicle for your needs is critical, and can mean the difference between success or failure.
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What financing options are available to my business?
When it comes to business funding options, a loan broker knows the marketplace; they’re familiar with all of the federal, state and municipal loan programs, and have relationships with local lenders and community bankers. Lenders are more likely to consider lending to businesses that have worked with a professional loan broker. They provide credibility to the professional loan request package. A professional loan broker isn’t going to send a client to a lender if they don’t think they’re ready.
Although online lenders such as Lending Club and OnDeck have become more common in recent years, lending advisors know that these are “loan farms” playing a numbers game to reach success, the borrower doesn’t receive valuable one-on-one guidance and therefore it is not recommended for business owners to seek out these financing sources.
“I don’t refer clients to programs that I’ve not physically spoken to a loan officer about,” Benjamin F. Johnson V, Principal of North Texas Loan Advisors, LLC.
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Are the loan terms a lender has offered to me good?
Before you execute a loan agreement, a professional loan broker will help you read the fine print and understand the terms and conditions. When a lender is showing interest in your loan, they will typically issue a conditional commitment letter offering you terms. A professional loan advisor will be available to guide you through the offer and help you make a determination on whether or not it works for your business.
Whether you are seeking financing for your next equipment purchase, moving your business to a new location, looking to grow your revenues to the next level, or just starting up, North Texas Loan Advisors, LLC has the professional experience and expertise to help you obtain success.