If you’re thinking about borrowing money for your small business, consider your needs and options first.
Would better cash flow handle it?
Look at whether your problem could be solved by improving your cash flow rather than getting a loan. For example, can you get more cash by improving the efficiency of your collections (in other words, how fast your customers pay you)? Or, could you switch to a just-in-time inventory system so that your money isn’t tied up in inventory that’s not needed now?
Create a cash flow projection
Study your financial situation. In addition to reports that capture what happened in the past, you need to create reports that represent your best-guess of future results. One key example is a cash flow projection. If you approach a bank to borrow money, they’ll probably want to see your cash flow projection and your business plan.
Consider the risks
When you apply for business credit, the lender will probably ask you to sign a personal guaranty. This means that if your business is unable to repay the loan, you are legally responsible to do so. If you can’t, there will be negative consequences for both your business and your own personal credit. So before signing a loan agreement, make sure you understand the terms: interest rate, maturity (the length of the loan) collateral requirements, and the amount the bank is willing to lend. Consider getting legal advice. Be sure that you clearly understand what your business — and you personally — are agreeing to.
Look ahead financially
Consider what are likely to be the future ups and downs of your business and how these will impact your finances. Through proper planning, watching your expenses, and collecting the money that’s owed you more quickly, you can shorten the periods of time that are financially challenging.
Click Next to learn about three types of small business credit.