When is Your Small Business Ready for a Loan?

Just like taking on personal debt, getting a small business loan is a big decision and a big investment! Many considerations come in to play both personally and for the direction of your business. So, what’s the difference between just taking on debt and investing in your business?

In the same way you’d leverage personal credit, business loans should be taken on for the right reasons. Examples include: cash to grow your business and product lines, buying inventory on a greater scale (thus better pricing from vendors), or even simply to establish a credit history for your company. Below are some basic product types and things to consider when exploring a loan for your small business!

Why do you need the money?

What are you hoping to buy or invest in with a business loan? This will absolutely be the first question any lender will ask so having a solid answer and doing some serious business soul searching is key. One of the best ways to think about framing this question is: Do you need the money to grow or do you need it to recover?

Ideally, a business loan should be taken on when your business is in a solid position financially and you can identify ways that additional cash flow or other investments would make a difference, especially in taking your business to the next level. If you need additional funding to recover from losses or pay back investments in inventory that didn’t work out, you might not be setting your business up for success by taking on additional debt.

What should you prepare? 

One of the first things to think about after you’ve identified the “why” is to review your business plan. Does it map out a clear direction for how you’ll use the funds? Are you able to show revenue and growth projections in professional, easy-to-follow financial statements? And very simply, is your business losing or making money after considering all your expenses?

You will also want to have a good handle on your personal finances and credit score, as most lenders will take all personal positions into account. This is where a professional accountant might be helpful (especially if you’re not regularly using one). Having an accountant give you an assessment of your overall personal and business financial health can give you a great idea of whether you’re in the best position to take on debt—before you go through the effort to formally apply for a loan.

Consider your options.

If and when you’ve decided that you’re ready to explore credit options, the best first step is to educate yourself on the range of products and lenders available to you. SBA data says that women are 30 percent more likely to try and start a business without seeking outside financing and only half as likely to obtain business loans from a bank. This means it’s even more important to seek out bankers and financial partners early. Short-term needs (like bolstering inventory or staffing for a finite project) require totally different credit products on a different scale, than say, looking to move into a new office space.

Option 1: Credit

One very simple type of credit line you’re probably already familiar with – a credit card! A product like this might be for you if you have unexpected expenses, purchase inventory you’ll be turning around, or simply to free up a little cash flow as you manage company expenses and pay vendors (or for things like company travel). Roughly 7 percent of startup capital comes from credit cards, according to the SBA.

If you have excellent personal credit, you might be able to get a company credit card at a potentially low rate or one that earns rewards useful to your business. Be aware that most business credit cards have some sort of fee structure, so be sure you know what other costs are associated with this type of product, in addition to the normal interest rate. With the right credit card and size of credit line, you might be able to manage your company’s needs without having to pursue a small business term loan.

Another benefit? There’s no need to put up collateral! This can mean your hard earned business assets in early stages remain completely your own. Further, high-volume purchases mean that rewards can rack up fast, becoming valuable to your company for things like travel and employee rewards. A credit card statement can also help business owners easily keep track of expenses and many interface easily with applications like QuickBooks.

However, beware of annual fees and, as with any credit card, the temptation for spending to creep out of control and not be tracked effectively. If you issue the card to more than one person in your company, you’ll also need to track accountability and be sure you can keep on top of multiple purchases.

Option 2: Fixed-Term Loans

Do you have a very specific purchase in mind or want to grow your business exponentially? If so, you might be in the market for a fixed-term loan, which has a set period of time to pay it back. You’ll also get the money in one lump sum, and are responsible for paying it back (likely monthly, depending on your lender).

These types of loans work very well for discrete, one time needs. For example, if you know you need a piece of equipment or technology that’s key to your business—say, a new sewing machine for your new handbag line—a fixed-term loan might be for you.

When considering how much money you may need, keep in mind you may be able to wrap in fees and other expenses into the total loan price. While it might be tempting to bump up a loan a few thousand dollars for “just in case” instances, remember that that interest will compound over time, making it even more expensive to pay back.

One of the most obvious purveyors of this type of credit product is the Small Business Administration, often called “SBA loans.” Keep in mind that you don’t necessarily have to use an SBA product if you are a small business. SBA loans involve a long process, often requiring a number of guarantees and extensive work with banking relationship managers.

Resources

The U.S. Small Business Administration is one of the first stops you should make when considering growing your business with credit. Whether or not an SBA loan is for you, there are numerous resources on their site, including tips on how to build your business plan.

Other organizations like Score partner with groups like SBA to connect entrepreneurs with mentors for free business advice. Score provides various low and no-cost trainings including webinars on a variety of topics and resources pointing you to local workshops in your area.

About Money has an awesome round up of 46 online resources for women’s business owners. I also love scanning Entrepreneur for articles focused on getting credit or grants for women-owned businesses.

Do you use credit for your small business? What are other resources you’ve considered?

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