A small business funding expert is cautioning small business borrowers to remain just as diligent in assessing the different credit options available in the improving economic climate.
David Gilbert is the CEO of National Funding, a small business funder that began with equipment leasing in 1999 before growing to offer merchant cash advances, small business loans and merchant services such as credit and debit card processing and gift cards.
Mr. Gilbert said with unemployment and delinquencies low and all major confidence indexes high, he is confident lending in this economic climate. The positive number confirm the first quarter GDP dip was a blip, and forecasters agree, as they predict 2.5 percent GDP growth for the remainder of the year.
The growing confidence means more small businesses will be looking to borrow, but Mr. Gilbert says they need to be careful because the most popular options come with their own unique good and bad points.
Some business owners look first to their credit cards, but they have to be careful. They should only be employed for short-term needs and the business has to be diligent about paying off the balance each month.
They should note that credit utilization rate accounts for roughly 30 percent of one’s credit score and frequently maxing out credit cards can skew the credit utilization rate and hurt a credit score. Many traditional lenders negatively view a high utilization rate, meaning it can impact future borrowing.
Credit cards also offer several useful benefits for small businesses, Mr. Gilbert said.
“Most credit cards offer cash back and rewards, which many people use to buy business supplies.”
Some also provide useful financial management tools that allow the small business owner to track spending by area and to monitor employee spending patterns. Many allow you to upload spending data directly into financial management software, he added.
Some businesses, especially those with irregular revenue flow patterns, may need to take out a working capital loan, which is often used to address accounts payable or wage shortfalls.
“Working capital loans are best employed for short purposeful uses or a one-off bigger expense where the owner knows they will be able to pay it off in a short period of time,” Mr. Gilbert said.
Working capital loans often come with quick turnaround times, which only makes sense given their best-intended purpose is to meet a temporary shortfall or to meet a surprise expense.
Mr. Gilbert advises against using working capital loans for expenses taking longer than a year to pay back. Using the example of an equipment purchase, he said a three to five-year lease makes better sense
When meeting with a prospective borrower, Mr. Gilbert said he discusses the purpose for borrowing so he can match the borrower with the best product. Looking at a borrower’s financial history can help determine if they are overly ambitious and how long it will take to pay off the balance. This often happens with companies purchasing too much inventory in order to get a discount, he said.
Small Business Administration loans are good for longer term obligations and come with good pricing because they are government-backed, Mr. Gilbert said. They are often attached to real estate, which is fine as long as you own your own building, he said.
There are some negatives, Mr. Gilbert said.
“SBA loans come with extensive paperwork, and many small businesses may not have all the required information.”
They are best employed as part of a longer term development because they can take as long as six months to approve. So do not apply for one when a pipe bursts.