Your in Charge: Borrowing Money Done Right
When small business owners seek access to capital, there are many variables to consider. The key to borrowing money is not just getting the loan -- but, making sure you get the right loan for the right reasons.
Consider these issues when securing a loan for your business:
(1) Are you securing the right amount of money with the right term and monthly repayment fees?
This may seem obvious, but it is essential that you work to match the needs of your firm with the monthly repayment schedule of the loan and the long-term cost of the loan. We strongly recommend all businesses assess the cost of the business loan (up front fees, term, interest rate and any repayment penalty) before securing a loan.
(2) Are you allowing your lender to hold too much collateral with your loan?
Many times banks (and SBA-backed loans) ask you to pledge collateral as part of your loan agreement. Pledging collateral (such as a home or other asset) can have additional impact on your finances and mobility. If you do have to pledge collateral, be sure the amount is sensible, that the amount declines as your loan balance declines and that, by making the pledge, you are not creating problems for the future.
(3) Work to improve your personal credit score.
As a small business owner, all lenders will consider your personal credit score as an indicator of your ability to repay a loan. The time and financial demands of small business owners can be great. We strongly recommend that you always make time to manage your personal credit and work to keep your personal credit record as positive as possible. We also recommend you do not mix your personal credit cards with business.
(4) Stay on top of your budget and aware of your cash flow projections.
If you are seeking a business loan, it is imperative that you have a good handle on your firm's budget, investments/liabilities and cash flow projections. Experienced business owners stay very focused and in tune with the financial status of their business and have an awareness of what situations can drive tight cash-flow periods.
When you are considering securing a loan, be doubly sure of your reasons why, how the loan will improve your firm's financial position and opportunities and your ability to repay the loan.
The more you know about the financial condition and cash flows your business the better prepared you will be to make good decisions when securing a business loan.