The Costco Connection

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
financing need.”
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-
chasing inventory.
“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.

small business
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 Consider an SBA loan