deciding whether to borrow

If your’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.

smiling female banker shaking mans hand

loans vs lines

Compare the difference between two credit products offered by lenders.


You borrow a certain amount of money from a lender and agree to repay it with interest over a certain period of time. Loans are typically used to make large, one-time purchases. The lender may ask you for documentation to confirm the cost of what you intend to buy.

Line of credit

A flexible way to borrow money at any time. Helpful for managing cash flow. The bank agrees to lend you up to a certain amount on an ongoing basis. You can use as much as you need (up to your limit) and pay back at least a minimum amount every month. You pay interest only on the amount you borrow.

three types of small business credit

“Secured” credit means that the lender knows you have the assets, or collateral, available to repay them. For example, to qualify for $1,000 of secured credit, you would need to provide the bank with proof that you have $1,000, either in cash or another acceptable form, such as equipment or investments.

“Unsecured” credit has no collateral attached. This means your personal assets are not a factor in the loan deal.

Loans or credit lines from the U.S. Small Business Administration (SBA). To qualify for most SBA credit, your business should have a good credit history and show the capacity to repay. For most SBA loan programs, you apply to a financial institution, but the SBA helps you, the business owner, by guaranteeing to repay the lender a certain percentage of the loan amount if you were unable to. Your business may be able to borrow a higher amount or receive a better interest rate than you would without an SBA guarantee.

Lenders make an investment in you and your business. It can be helpful to work with a lender who is familiar with your type of business.