By Don Sadler
IF YOU OWN A small business, there are
many reasons you might need to borrow
money from a bank. For example, your business might be growing and you need a cash
infusion to finance an increase in receivables
and inventory. Or maybe you need a loan to
help plug temporary cash-flow gaps. Or perhaps you need financing to purchase a new
commercial building, equipment or real estate.
These are all common and legitimate reasons small-business owners approach their
banks about a loan. Before doing so, however,
you should have a clear understanding of the
different types of business loans.
Why do you need money?
“It’s important to know why you need to
borrow money for your business and how
you intend to repay, because this will dictate
the specific kind of loan the bank is going to
try to structure for you,” says Howard
Goldman, a Costco member and partner at
CFO Edge ( cfoedge.com) in Los Angeles, a
provider of outsourced CFO services. “There
are a number of different types of bank loans,
so your loan needs to match your specific
According to Goldman, the most com-
mon type of business loan is a line of credit.
This loan enables your business to borrow up
to your preapproved credit limit whenever
you need money, without having to reapply.
“It’s a good idea to establish a line of credit
before you actually need to borrow money so
you have easy access to cash when you need
it,” he says.
A line of credit is primarily intended to
meet short-term, recurring financing needs,
notes John Barrickman, a Costco member
and the president of New Horizons Financial
Group ( newhorizonsfinancial.com), a finan-
cial consulting firm in Amelia Island, Florida.
These needs include plugging cash-flow
gaps, funding accounts receivable and pur-
“Banks often structure lines of credit to
mature in a year or two so the business can
demonstrate its ability to ‘clean up’ the line, or
pay it down,” says Barrickman. “At this point,
the bank may choose to renew the line.”
A term loan, on the other hand, is
designed to meet longer-term needs such as
the purchase of fixed assets like plant, property and equipment. Goldman explains that
term loans are amortized over a number of
years that should match the depreciable or
useful life of the asset being financed. “Term
loans may also be used to finance permanent
investments in accounts receivable or inventory,” he adds.
Lease versus loan
For equipment acquisitions, leasing often
makes more sense than borrowing money to
buy the equipment. This is especially true for
equipment with built-in obsolescence, such as
computers and other high-tech equipment.
“Leasing may also offer tax benefits and help
free up cash flow, since the entire cost of
equipment can be financed,” says Goldman.
“This may enable you to use cash for other
more productive and profitable purposes.”
Commercial mortgages, meanwhile, are
used to finance the purchase of new or exist-
ing commercial property, including office
buildings, warehouses and retail space. And
construction loans are used to finance the
purchase of land and the construction of
owner-occupied buildings or a plant. “By pur-
chasing your business facility, you can lock in
your cost of occupancy for the long term if
you can obtain a fixed rate,” says Barrickman.
Enough but not too much
Your banker will work closely with you to
structure the right type and term of business
loan for your specific need in an amount that’s
“enough but not too much,” says Barrickman.
“A well-structured loan is one that can be
repaid without undue strain on the borrower,”
he adds. “To ensure proper loan structure,
you should have a good understanding of the
purpose of the loan and how you intend to
repay it, and then clearly explain this to your
banker. This will help ensure a mutually beneficial relationship between your business and
your bank.” C
Don Sadler is an Atlanta-based writer
specializing in small business and finance.
The Costco Connection
Costco members will find a wide variety
of business services available through the
Costco Services program, including payment
processing, payroll services, business checks
and forms, credit reports and more. Go to
Costco.com and click “Services.”
MANY SMALL BUSINESSES can benefit from
Small Business Administration (SBA)
loans. The SBA guarantees a portion
of these loans, which often enables
banks to make small-business loans
that might otherwise be considered
too risky. The most common SBA
loans are 7(a), 504 and SBAExpress
loans. Visit sba.gov to learn more.—DS
Matching your business
loan to your needs