Securing Your Future: Key Factors in Choosing a Financial Partner

Choosing a Financial Partner


To capitalize on market opportunities, selecting the right financial partner is crucial. Far from a mere transaction, your relationship with your financial partner can significantly impact your business's trajectory and resilience. Choosing the right partner hinges on prioritizing three key factors:


→ SBA vs. Conventional Loans


 

1. Type of financing

When evaluating financing options, business owners should weigh the pros and cons of SBA vs. non-SBA financing. Below are some general pros and cons:

  SBA Non-SBA
Pros
  • More lenient eligibility requirements
  • Governmental guarantee (75%-85% backing)
  • Cap on max rates
  • 80%-90% financing
Cons
  • Spousal guarantee and lien on home required for loans >$350k
  • Limited customization
  • Frequent guideline changes
  • 10% down payment requirement
  • Some succession and acquisition deals may require immediate owner exit and/or personal loan guarantee. Any seller financing must be deferred during SBA loan.
  • Stricter eligibility requirements
  • Generally, not available to start-up businesses
  • Not government backed
  • Greater covenant requirements

 

 

2. Strength and stability

Choosing a financial partner that knows your industry and will provide reliable capital and services, even in the face of unexpected circumstances or challenges is important. Talk with your financial partners about their portfolios and research their performance metrics to determine if they are effectively managing risk.

A key metric to look for when choosing a financial partner is their capital to assets ratio. Look for a financial partner with a higher-than-average capital to asset ratio (national average is 15.4% as of Q4 2024) and a strong borrowing capacity.

And, lastly, a financial partner who is committed to a long-term relationship and servicing support tends to offer more supportive lending practices that prioritize the success of their customers over their own short-term interests.

 

3. Rate type

The benchmark rate your loan is tied to significantly impacts your borrowing costs. Lenders typically price loans using one of the following base rates plus a spread:

Treasury-based rates

These are anticipatory in nature and are already showing signs of decline. Treasury rates more accurately reflect market expectations and investor confidence in future economic conditions.

Prime-based rates

These tend to be more reactive and follow Federal Reserve decisions more directly, potentially resulting in delayed adjustment to changing market conditions.

Selecting a treasury-based rate structure may provide better alignment with forward-looking market trends, particularly in the current environment where treasury yields indicate potential rate reductions in the coming periods. SBA loans are based on the Prime rate plus a spread, while non-SBA loans can be based on either rate type. So, it’s in your best interest to ask potential financial partners how they derive their loan rates.

Selecting a financial partner is not merely a transactional decision; it's a strategic alliance that can profoundly influence your business's long-term trajectory. A dependable financial partner provides not only capital but also strategic guidance and unwavering support, especially during economic fluctuations. Therefore, prioritize partners who exhibit a proven track record of stability, transparent practices, and a genuine commitment to your business's enduring success. The right partner will be an asset that grows in value over time.

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Disclaimer: Please note, Oak Street Funding does not provide legal or tax advice. This blog is for informational purposes only. It is not a statement of fact or recommendation, does not constitute an offer for a loan, professional or legal or tax advice or legal opinion and should not be used as a substitute for obtaining valuation services or professional, legal or tax advice.