Is a Cash Reserve Important During the Loan Application Process?
by Pete Zeiser
The old adage “cash is king” can be applied in a variety of financial scenarios, and the more you have the greater your options. Cash reserves can serve several purposes when applying for credit. You may need to provide a down payment when applying for loans to purchase real estate, equipment, or vehicles. Twenty percent down is a good general rule of thumb; however down payments can vary, and sometimes you may be able to secure better rates and terms with a larger down payment.
Banks also want businesses to demonstrate they have ample cash or access to other forms of liquidity, such as a line of credit, to support its current working capital needs. This helps demonstrate the business is applying from a position of strength. A business loan should help supplement a business’ cash position, not necessarily replace it. When a loan is being pursued for a project that is more speculative in nature, a bank may require several months of cash reserves to provide for payments before the project begins performing.
Sometimes it may even make sense for a business to pursue financing when they have sufficient cash on hand to support the investment. Maintaining dry powder for future opportunities, especially those that require quick action, is often an end goal of securing credit even when ample cash is available. At the end of the day, cash provides flexibility and shows a bank your kingdom is built on solid ground.
Answers provided by Pete Zeiser, President - Chesterfield Commercial at Midwest BankCentre. He can be reached at 314-633-6762 or pzeiser@midwestbankcentre.com.