“I own a business and we need some money, can you help?”
“What do you need the money for?”
“Oh lots of things…”
“How long do you need the money for?”
“Maybe 6 months to a year”
“How will you pay it back”
“Well we are having a really good year and just seem to be a little short so we need to borrow some money to get over the hump”
This is the most common conversation I have with small businesses who are looking to borrow money. They do not always know exactly why they need money and are not able to articulate how they are going to pay it back. The most popular business loan request we get is for a business line of credit. The problem is that a business line of credit usually means “working capital” (see blog here). Working capital (and lines of credit) are very difficult to get.
If you are a business owner and your business needs to borrow money, consider the following before you get too far in looking for options:
1. Why exactly does you business need the money? Is there a gap between your receivables and payables? Do you need to purchase a new piece of equipment? Are you buying out a partner? Are you buying a competitor? There is always a root cause for why your business needs money.
2. How will your business pay it back? In determining why your business needs money you should be able to then determine how it is going to pay it back. If you have a gap between your receivables and payables how are you going to shrink the difference? If you are purchasing a piece of equipment, how much more business will you need to do in order to pay it back?
3. What is a back-up plan if the business is not able to pay it back? This is style over substance but business owners that can provide a “Plan B” are always seen more favorably by banks and lenders. This shows that a business owner understands their business and can articulate an alternative method of repayment if necessary.
It’s worth the effort to think about these things before you go and seek a loan for your business. You may discover some areas of your business that could be improved without borrowing money that improves your bottom line.
The naive believe anything, but the prudent give thought to their steps. – Proverbs 14:15 (CEB)
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