Whether a start-up or growth phase, most businesses ultimately need to borrow money. Here are some items to consider before borrowing.
- Reasons for Borrowing
Every potential lender will want to know the purpose of the loan. As with personal borrowing, lenders will look more favorably if the funds are going to be used to produce lasting value for the business. A loan to expand the business to meet the needs of a signed contract with a major customer will be more attractive to a lender than one where the proceeds would be used to meet ongoing operating payroll needs due to a slowdown in the business.
- Borrowing From the Right Source
Approach lenders that make loans to businesses of your size, in your industry or in a specific geographic area. If the institution already knows you, your business, your industry and potentially your customers, they may already have a great deal of the information they need to make an informed lending decision.
If you expect to use the funds to purchase a piece of equipment, you may want to discuss equipment leasing options with the equipment seller. Many manufacturers of machines (from office equipment to large industrial equipment) have leasing arrangements with lenders that may be familiar with your type of business.
- Type of Loan Sought
Be certain the repayment terms of the loan are consistent with your expected cash flow.
Be prepared to offer collateral that is tied to the purpose of the loan. Getting a loan to purchase a large new machine may require you to offer a security lien on the machine as collateral. Try to avoid pledging large amounts of collateral for relatively small loans.
Depending on the size of your business, you may want to investigate a Small Business Administration loan. The SBA encourages lending to small businesses by guaranteeing parts of loans made to businesses of certain sizes where the proceeds are being used for certain purposes. You can talk to an institution offering SBA loans to learn more.
- Documentation Needed
You will be required to complete a loan application which will request corporate, and perhaps personal, financial information. You will likely need to provide:
- Business tax returns
- Potentially, personal tax returns
- Business financial statements
- A historic cash flow statement along with projections for the current year
- List of significant contracts with customers and vendors
- Other important information such as patents or key proprietary information
- Business Plan
Your business plan should play a major role in your decision to borrow and may also play a major role in a lender’s evaluation of your loan request. The plan should be up to date and include:
- Business description
- Marketing strategies
- Competitive analysis
- Development plans
- Operations details
- Management plan
- Key personnel
- Financial information
- Other important information
- Business Practices
You should be prepared to answer these questions:
- Do you have a credit policy and is it enforced?
- Does your accounting system adequately show the condition and results of your business?
- What is your accounts payable policy? Do you negotiate favorable terms with key vendors prior to placing of orders? How current are you with payables? Do you take advantage of discounts for prompt payment?
- What type of insurance coverage do you have? Is there adequate insurance for liability and property damages?
- Are all your payroll, property and income tax filings current?
- Do you use the services of a qualified tax professional to help ensure that your tax benefits are maximized?
Use the preparation of getting ready to borrow as a tool to evaluate your business and plan for its success. The proper preparations can strengthen your business and strengthen your case for borrowing.