5 things to know before trying to secure a line of credit

It should go without saying that small businesses are a vital part of the American economy. Both consumer and retail companies make up an important part of the small business community.

Currently, there are over 500,000 consumer and retail businesses that have revenues of less than $10 million a year. Many of these small businesses will seek to expand at some point by hiring new people, opening new stores or launching new products. All of these things take capital, and most businesses will need to borrow or raise equity to finance these expenditures. For larger and more profitable businesses, a loan from a bank may be a viable option; for others, a loan from an alternative lender may be more feasible.

There are a variety of lenders in the market today that offer an array of financing options. With all these options available to consumer packaged goods companies, there are strategies these companies should consider when seeking a loan. Here are the top five things businesses should keep in mind before they try to secure a loan, whether it’s from a 100-year-old bank or a 5-year-old alternative lender.  

1. Know your lender’s all-in annual percentage rate

Many lenders will mask their APR by quoting a low interest rate. But fees and charges add up and should be included in the overall cost of borrowing. Everything from an origination fee to the fee the lender charges you to wire your business money should be included in your total cost of borrowing.

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2. Read the loan document carefully

Know what you’re getting yourself into and ask questions. The best place to start is in the negative covenants section; work your way around the document and make sure you understand it all.

3. Shop around

It should go without saying, but don’t put all your eggs in one basket. Make sure you exhaust your options and look for different types of lenders that offer different structures. If your assets are growing quickly, an asset-based lender could be a good fit. If you sell direct to consumer, a cash flow lender might be advisable.

4. Don’t wait

Too often we see companies that say they “need the money yesterday.” Don’t wait until the last minute to start finding the right lender. If you’re expecting a large purchase order from a big retailer, start looking for help immediately. There’s no harm in having a plan and a backup plan.

5. Ask for references

Just as you would ask for a reference from a manufacturer or new hire, treat your lender like a partner. Make sure you do the due diligence on them, just as they would you.

There are a lot of lenders out there who are looking for borrowers. Some may have flashy technology or websites but lackluster products. Others may try to bury their real rates in paperwork they hope you never read. It is worth taking your time when you consider credit options. Ask a lot of questions and make sure your lender looks at you as a partner and not just a business they are trying to make a quick buck from.      

Jeff Weddell is head of business development at CircleUp Credit Advisors, the credit division of investment platform CircleUp.