Patten and Company

Planning for a Business Loan: How to Be Prepared and Secure the Best Terms

At Patten and Company LLC, we understand the unique challenges and opportunities businesses face to secure funding. If you’re building a small business and haven’t yet needed to borrow funds to expand or smooth out cash flow irregularities, you’re doing something right. And if you have borrowed and everything went smoothly, kudos again. For those who foresee the need for credit in the future, anticipating this need well in advance can significantly enhance your ability to secure a loan with competitive terms.

The Importance of Cash Flow Forecasting

Maintaining a proper cash flow forecast is critical to achieving favorable loan terms. Twelve months is generally sufficient unless you plan major strategic initiatives. This forecast allows you to account for seasonal variations in cash flow and ensure accuracy.

Constructing a Forecast

Creating a 12-month forecast can be straightforward. Start with a spreadsheet with 12 columns labeled by month. Each month’s column begins with a starting cash balance, followed by entries for sources of cash such as receivables, cash sales, and loan proceeds, culminating in a “total cash” figure.

Next, list all categories of cash uses, including payroll, vendor payments, rent, loan payments, and payroll taxes, leading to a “total uses of cash” figure. Subtract the total uses of cash from the total money to get the “end-of-month cash.” Repeat this process for each month.

For example, if July is your first month, the “end-of-month cash” for July becomes the “beginning cash” for August. Adjust numbers based on historical data and expected changes. If sales typically slump in October by about 5%, adjust accordingly. If business insurance is paid annually in March, include that.

Keeping Your Forecast Updated

As each month passes, update your forecast with actual figures to maintain accuracy. Continually add new months to keep a rolling 12-month forecast. This dynamic approach helps you assess the accuracy of your predictions and adjust for any deviations.

Determining Your Borrowing Needs

The effort you put into forecasting pays off when determining your borrowing needs. Your forecast might reveal that you don’t need a loan at all, or it might show a temporary cash shortfall or an opportunity for timely investment. If borrowing is necessary, the sooner you identify the need, the better. Approaching lenders well in advance positions you to negotiate better terms.

Understanding Business Loans

When considering a business loan, several key features should be evaluated:

  • Interest Rate: Fixed or floating, and what it’s pegged to.
  • Secured or Unsecured: Whether collateral is required.
  • Amortization: Paying down principal plus interest or just interest with a balloon payment at the end.
  • Equipment Lease vs. Loan: Sometimes, leasing capital equipment is more beneficial.
  • Loan or Cash Advance: Selling receivables at a discount can be an alternative to borrowing.
  • Kind of Lender: Working with a direct lender versus a loan broker.

Next Steps

This guide is just a starting point. For a detailed cash flow projection and specific advice on securing a business loan, contact Patten and Company LLC. Our experienced team provides expert guidance and support to navigate the loan process and achieve your business goals.

Contact us today to learn more about how we can assist you in planning for a prosperous financial future.

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