Questions Before You Borrow
After shaking the guts out of your piggy bank and hitting up friends and family for some extra dough, you've decided that you want some more financial muscle behind your business. That means a visit to your friendly (you hope) banker.
But before you even think of approaching a lender about a business loan, there are some pretty important questions you should ask yourself.
Start with this one: “Do I really need the money?” That might seem like a silly question, but the answer is not always yes.
When you’re just starting out or when your company is experiencing some growing pains, your need for cash can be pretty great. At those points, you may have no choice but to borrow.
Still, there may be plenty of times over the life of your business when you could avoid borrowing with other measures - by more aggressively collecting receivables or better managing existing cash flow, for instance.
When You Need It and You Know It
But let’s say that after careful analysis you've decided it makes sense to borrow. Here are the next questions you should ask:
Why do you need the money?
As a cash management tool? As a cushion against risk? For equipment? For inventory? Are you using it to finance an expansion? Any lender will require you to spell out exactly how you’ll use the money.
How urgent is your need?
Consultants at our Small Business Development Centers will tell you it’s tougher to get a business loan when you have a crisis unfolding in your company. It’s easier to analyze your financial position frequently, make necessary adjustments, forecast future needs, and seek bank financing before your need an emergency capital infusion.
How great are your needs?
All businesses carry risks, and the degree of risk will affect both the cost and availability of financing.
What is the state of your industry?
Depressed, stable or growth conditions may have different cash requirements, and they certainly demand different approaches to lenders. Companies that are profitable and on-the-grow are better risks from a lender’s point of view. They’re more likely to get more money at more favorable terms than companies that are struggling.
Is your business seasonal or cyclical?
Seasonal needs for financing are generally short-term and are designed to support a business through down periods.
How strong is your management team?
A lender’s willingness to pony up the green stuff is greatly affected by his or her confidence in the people running your company. You need to be able to show them that you know what you’re doing – and that you’re good at it.
It's All About the Plan
All of the preceding questions will have some bearing on a bank's decision. But here's the most important question of all: How does your need for financing mesh with your business plan?
If you've just scratched your head in confusion and said “My whaaaaaaat?” you've got lots of work to do before you even think about asking anyone for money.
All lenders from banks to angel investors and everyone in between will want to see a written, well-considered plan for the startup, management and expansion of your business.
Consultants at our Small Business Assistance Office can help you understand more about financing your business and about the basics of business plans. And our network of Small Business Development Centers has experts located in nine main regional offices and several satellite centers statewide.
Our Guide to Starting a Business in Minnesota provides a detailed look at this and other important issues.
Watch this 30-minute tutorial on financing options for small businesses developed by the U.S. Small Business Administration.