Preparing to Borrow
Whether it is for
the start-up or growth phase, most businesses ultimately need to borrow
money. Here are some issues to consider as you approach the borrowing
process. Addressing them as you start the borrowing process can increase
the chances of getting the loan and make the process much easier.
1. Reasons for
Every potential lender will want to know the purpose of the loan. As with
personal borrowing, potential 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 slow down in the business.
Build a case for how
the funds will enhance the short-term and long-term results of the business.
2. Borrowing From
the Right Source
Be sure you have considered all of your alternative sources of capital
before you go to a financial institution. While running up your credit
card balances can be expensive and asking relatives for funds can be difficult,
those alternatives may be preferable especially if the loan is for a small
amount or for a short period of time.
Are you approaching
lenders that are accustomed to making 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.
You also need to consider
whether your primary financial institution is the right lender to approach.
3. Type of Loan
Does the repayment term of the loan match with your expected cash flow?
For example, will receipts from your receivables enable you to meet the
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. While the paperwork and time frames may be onerous,
this may be an option to consider.
You will required to complete a loan application which will require corporate
and perhaps personal financial information. In addition, you will probably
need to provide:
- Tax returns for
the business for the past couple of years.
- Potentially, personal
tax returns for the past couple of years.
- Financial statements
for the business for the past couple of years and a year-to-date statement.
The lender will probably want both income statements and balance sheets.
They may also want detailed information on accounts receivable, accounts
payable, investments and fixed assets.
- A historic cash
flow statement along with projections for the current year.
- The lender may
also want copies of significant contracts with customers and vendors.
- Other important
information such as patents or key proprietary information.
5. Business Plan
Your business plan should play a major role in your decision to borrow
and may play a major role in a lender's evaluation of your loan request.
The major components of the plan should include:
- Business description
- Marketing strategies
- Competitive analysis
- Development plans
- Management plan
- Key personnel
- Financial information
- Other important
Be sure your plan
is up to date and provides all the information the lender will need to
understand your business and make a fully informed lending decision.
6. Business Practices
Any lender will want to evaluate how you run your business and 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
- 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?
Borrowing money for
your business is a serious step. Use the process 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