If you’re in the market to borrow money for you small business to solve your cash flow problems, there are a few important things you need to know before you take that leap. Borrowing money for a small business is a huge decision and can have lasting effects on your company, (either good or bad). Therefore you’ll want to know what you are getting yourself into. It’s never wise to simply borrow money without knowing how your company can be impacted by it. Borrowing money for a small business to solve your cash flow problems is doable but may not work for everyone so if you plan on doing it, it will benefit you to know how to do it the right way. Here I will give you a few tips and things to think about before you make that move.
Tip #1: Avoid borrowing when you are in a bind – In my professional experience, it’s never wise to borrow when you are in a bind. All businesses have cash flow issues at some point but if your cash flow issues are causing your business to be on the brink of closing down, borrowing money to save it may not be the best solution. I’ve dealt with many business owners who have borrowed money when they were in a bind, hoping those funds would yield a high return in a relatively short period of time to help the business get back on its feet. And when that doesn’t happen, they find themselves over-extended. So now, not only do they have to pay for the business expenses they had before they borrowed the money, the have an additional expense to cover – loan repayment. That loan repayment usually puts them over the edge and causes them to do what they wanted to avoid in the first place – closing down.
Tip #2: Borrow before you need it now when you need it – This goes back to avoiding borrowing when you are in a bind. The best way to avoid borrowing when you are in a bind is to borrow before you need it. If you have a well thought out business plan in place, more than likely you know how much money you need to operate. If your business is bringing in revenue and doing pretty well, why not preserve your cash flow and take out an unsecured business line of credit to cover some of your operating expenses? With an unsecured business line of credit you will not have any monthly payments unless you actually use it. Therefore you can have access to additional capital (to use whenever you need it) and you will not have to worry about an additional expense (in this case a loan repayment), until you use the funds (unlike with a small business loan). [Click here to learn the differences and benefits of using a business line of credit instead of a small business loan].
Tip #3: Know what funding options are the most suitable for you – All small business financing options are not created equal. There are small business loans, SBA loans, microloans, small business lines of credit or credit cards, merchant cash advances, factoring/accounts receivables financing, purchase order financing, import/export financing, 401k/IRA rollover financing, and equipment financing, etc. Lenders that offer these types of financing will require you to meet certain criteria to get approved. The criteria for approval for a microloan will be totally different than the criteria for approval for a small business line of credit. Qualifying for any one of these types of financing can depend on what stage of business you are in (startup, emerging, or established business stage), your personal credit history and score, your personal income, and/or your business revenue. Understanding the criteria for approval for each one of these types of financing will help you understand which one is the most suitable for you based on your unique situation. The best way to find out which option is the most suitable for you is to speak with an expert who is well-versed in the small business financing industry and who has experience in working with lenders that offer all of these financing options. If they truly know what they are doing, they will be able to analyze your situation and tell you which type of financing is the most suitable for you.
Tip #4: Keep your personal credit separate from your business credit – As a small business owner, building business credit should be one of your top priorities. Building business credit during the early stages of your business will enable you to preserve and protect your personal credit. You can start building your business credit by taking out vendor/trade credit from companies like Uline, Quill, or Office Depot. Then you can go on to apply for unsecured business lines of credit from banks such as Chase, Bank of America, and Barclay’s, etc.
Brittni Abiolu is the Owner & Publisher of www.CapitaLinker.com. Through her website, she serves to educate entrepreneurs and small business owners on how to increase their chances of obtaining capital in the simplest way possible and how to find and connect with the most appropriate funding sources. You can connect with Brittni on Linkedin, Google+, Twitter, Facebook, and Pintrest.
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