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The financial health
of your business is paramount to its success. First,
before considering a business loan, you must have a
very clear picture of the fiscal status of your business.
If you use accounting software, review your profit and
loss reports. You may also want to review the past six
months of your bank statements. If you are in sales
(retail or wholesale), were you able to cover all expenses
and turn a profit? If you are in a service business,
take a look back at your last dozen or so projects;
and ask yourself the same question, were you able to
make a profit?
A loan should be
for a specific purpose. Some typical scenarios might
include:
- Adding new staff
(short-term or long-term; part-time or full-time)
to help manage new business or assist with a special
project.
- Purchasing equipment
or specific supplies to service additional business or to
service current needs more cost-effectively (i.e. a color
printer to save on the cost of color copies).
- Covering operating
costs during your "slow revenue" business cycle.
- Purchasing inventory
to take advantage of special pricing opportunities.
Carefully consider not
getting a loan. Remember, a loan is debt that you will have
to repay. You may be able to cut expenses, delay some purchases,
and revamp operations procedures and policies to run your
business on bare bones. Set a goal to do this for three months
and see if you can manage without getting a loan.
Some Resources for
Loans
If you determine that
a loan is necessary, you can tap into these potential resources
before going to your banker:
- Personal credit (be
sure you know the interest rate; penalties for late payments).
It may be a good idea to consider for a very short term
loan if you know 100% you will have the income to cover
repayment in a timely manner.
- Retirement plan/savings (be sure to review penalties that may be associated with
any early withdrawal).
- Home equity loan (rates
may be reasonable; be sure you aren't jeopardizing your
major asset).
- Family and friends (develop a written letter of agreement stating how much
you will pay back; when you will pay it back; and what interest
you are willing to pay). Be sure you are willing for a family
member or friend to tell you "no" before you ask.
Also, honor any agreement faithfully. This type of loan
obviously creates a risk of damaging the relationship, so
proceed with great caution.
For a larger and longer
term financial situation, you may want to consider an SBA
(Small Business Administration) loan. You can visit their
website to find an office location near you. The SBA has counselors
who can meet with you to assist with the process. Additionally,
most banks have a small business division or manager who can
give you guidance.
Take a proactive approach
to your financial health and establish a line of credit. This
is a resource you can tap into if you need it. Most operate
like a revolving charge account. You only pay against the
amount you actually use, not against the full amount. The
business may have to provide collateral; and you may be asked
to serve as personal guarantor.
Don't be afraid to make
an informational appointment with your banker or with a CPA
who specializes in small businesses. In a one-hour appointment,
you will find out what you need to do to be considered "credit
worthy" by your financial institution. Such information
can help you prepare for taking out a business loan or shaping
your operations so you can avoid the necessity for a loan
altogether.
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