You’ve made the big decision, but how do you start? Owning your own business is often a dream that just never gets off the ground, never makes it past that really great idea and inevitably never seems to be your reality. Heartland bankers are experts at small business financing and are tasked with making their communities better through business building and helping you with yours!

Heartland Bank Sales Manager Brent Voss digs deep into his banking experience to offer his insights into small business lending and all the intricacies that dreamers need to know. Check out his question-and-answer message below:

1. I’m starting a small business. What are my financing options? That’s a really great question. The answer depends on several factors. Are you buying into a franchise? Do you need to purchase equipment or inventory? The best thing you can do is create a business plan. In the plan, you need to identify the area where financing will be required to fill in the gap between what cash you are putting into starting your business versus what you need to finance. Inventory and equipment are usually financed with a business loan. They are usually secured by the same inventory and equipment they were used to purchase. A business line of credit may be used to finance needs that are short-term in nature. A good example would be to pay for components needed to make a product. You then pay back the line of credit once you have sold the products you made. The best thing to do is create a business plan and meet with a banker who understands your goals and financial needs. They will then provide the most appropriate solution.      

2. I know my personal credit score, but will my business have its own credit score? This question is a very common one and is a perfect example of the difference between consumer lending and business lending. Businesses do have a credit score. Two popular credit models for businesses are Dunn & Bradstreet and Experian Intelliscore Plus. However, a lot of businesses don’t have a score. There are several reasons for this. The business might be new or has never had any financing issued in the name of the business. When a lender evaluates a business lending request, they will consider several factors. Examples are as follows: credit score of all guarantors, collateral used to secure the line or loan, business cashflow and business industry risk. If your business is new or does not have a credit score, it is usually not a problem if all of the other lending factors are in line with the lender’s lending policy guidelines. To create a business credit score, you need to obtain lending in the name of the business and make on-time payments just like you do on your personal credit.    

3. I will probably need a credit card for my business. How can I get a credit card if I have a new business? It’s actually surprisingly easy. The best way is to guarantee the credit card by all of the owners of the business. Being a guarantor on a business credit card or other business lending product is not a bad thing. It is extremely common. The reason financial institutions ask for an owner to be a guarantor is often tied to the business’s continued existence being contingent on the owner’s participation in the business. Basically, without the owner of the business would it continue? The answer often is no. It is for this reason that owners are asked to be guarantors.  

4. Should I have a line of credit now, or should I wait until I really need something or have an emergency? There are a few schools of thought to this question. Many lenders will advise getting a line of credit before you need it. The reason for this is that the line of credit will be in place when you do need it, and thus, you will not need to wait. Another reason is that your business will look its strongest from an underwriting perspective when your cash flow is consistent and positive. However, not everyone needs a line of credit. My advice is that if you have the occasional short-term lending need or the potential for a gap in your cashflow cycle, a line of credit might be a good solution for you. On the other hand, if your business is service based, you likely will not need a line of credit unless you need to finance inventory to supply the service you provide. Think of an automobile repair business. Their service is to repair vehicles. They need to finance the parts they need to buy to make the repairs. They then pay the line of credit back after the customer has paid for the service. It is never a good idea to use a line of credit to fund a business. If a business is not profitable and its cash flow is not positive, a line of credit will not be a long-term solution. It will only be a Band-aid. The business will need to make changes to become profitable and establish a positive cash flow again.

5. Do you have any advice for obtaining financing…community bank versus big bank? A community bank is a great solution for businesses to obtain financing. As a community bank, we look at the complete credit request/history which includes the owners, guarantors, business industry, collateral, and most importantly, their stories. It is extremely rare to see a perfect business lending request. It is also rare to see a borrower with a large cash position, great credit, an established business and excellent cashflow. This is where we want to hear the borrower’s story. If the owner or guarantor’s credit is not perfect, that is ok. If the cashflow is a little tight, that can also be mitigated. Sometimes, we even need to be creative with the collateral. At the end of the day, a community bank looks at the request and makes a decision based on the entire story. We understand our communities and believe in those that live and work in them. As a result, we are uniquely qualified to make business loans in our communities. So, share your story!

6. Can you explain an SBA loan in simple terms and tell me if I would need this for my small business…versus just a loan from Heartland? The Small Business Administration usually is brought in on a loan request to mitigate the risk. Essentially, if a loan request is not strong, a financial institution may request to process it as an SBA loan or line of credit. While the SBA can and does do loans on their own, they most often are used as an additional component of a lending request by a financial institution. If a bank has concerns about a lending request, they might want to add the SBA to the loan request. Should the business default, the SBA will ensure that the financial institution does not take a loss on a percentage of the loan or line of credit. An SBA guarantee does not provide a solution for a bad loan request or a lack of collateral on a lending request. An SBA guarantee helps strengthen a business loan or line request when needed to help facilitate the request for financing.

If you need a lending expert in your corner, Heartland bankers are up for the challenges encountered when financing small businesses. Don’t put your dreams on hold for lack of information…contact Heartland Bank today to swiftly get your business off the ground and shake-off those hesitations!