Have you ever considered taking on a business loan to help finance your goals? Before you do, it’s important to take a step back and fully assess whether you are prepared to make the commitment. Follow these five steps to determine if your small business is ready to borrow money:
Your cash flow is steady.
Of course, the most important thing to consider when applying for a business loan is “can I pay it back?” While no business is completely immune to the ups and downs of the economy, you should only borrow money when your cash flow is steady and growing. If you’re struggling to meet payroll and other monthly expenses, now is not the time to apply for a loan.
You understand how the loan will contribute to your bottom line.
What will you do with the money you are borrowing? Will you open a new location? Expand your sales team? Invest in more inventory? Before applying to borrow money, you should have a specific plan in place for how you will use it and make sure the loan is absolutely necessary. Whatever it is, this plan should create lasting value for your business.
You’re willing to borrow below your means.
One of the biggest mistakes borrowers make is taking on a big loan that is more than they actually need. Before you go loan shopping figure out your ideal dollar amount, including calculating monthly payments and make sure it’s realistic for you to pay off the loan, and realistic enough to be valuable. Knowing your current financial situation and borrowing the least amount of money possible keeps the process clean and makes payback easy. Don’t forget to factor in the fees that will be included in your loan.
You meet the basic requirements.
While each business lending institution is different, most have the same basic requirements that must be met to qualify. For example, all loan programs require you to submit a business plan including a complete set of projected financial statements, profit and loss, cash flow and a balance sheet. Make sure you are prepared to show a lender why you’re worth their investment through a strategic business plan. Get this in place long before you need to so you can take opportunities to apply for lending when you need it. It will also help you see how your company appears as a candidate for a loan. If you notice any deficits in your business plans (like an unsteady forecast of future cash flow), you can make adjustments prior to applying for loans.
Your credit is in good shape.
Your personal and business credit report will also be an important aspect of the application process. Check in with your credit by going to www.annualcreditreport.com for your personal credit. For your business credit report, seek out a report from Dunn & Bradstreet and Experian as a baseline. If there are any glaring problems, like late fees, collections accounts or an inequal balance between your available credit and current debt you may need to improve your scores before being able to take advantage of small business credit offers.
Are you considering applying for a small business loan? Have questions? Comment below!