At some points in the course of your business, your company might benefit from an infusion of money. The prospect of taking out a loan and assuming debt can be daunting, especially loans that you might have to personally guarantee, but there are circumstances in which it may make perfect sense.
Some businesses are costly to start. You may need enough capital to cover a few months’ rent for an office or a retail location. You might require warehouse space, computers or other equipment. Advertising and marketing costs money. And then there’s the cost of employees.
Unless you’re independently wealthy, chances are you won’t have enough money to get up and running, and will need either a small business loan or an investment to start your company and keep it going until it starts to turn a profit.
You may even have managed to put together enough money to start your business, but it may be months before you start seeing any come in. Most new businesses fail not because they don’t have enough to open the doors, but because they don’t have the proper reserves to keep them open. Having financing in place before you begin will buy you the necessary time to build a successful operation.
A lender or investor will likely want to see a business plan before committing funds to a startup, so spend the necessary time to put one together.
Many small businesses operate on fairly small profit margins, which doesn’t leave a lot of extra money lying around for expansion. If you’re ready to take that next step for your company, whether that means opening another store, hiring more staff, or adding an additional product line, you might need some extra cash to pull it off. The plan would be to repay the loan from the additional profits of the newly-expanded operation.
You’ll need to work out all the financial projections to make sure you would, in fact, be able to handle the extra obligation of loan payments, but approaching a lender with expansion plans and a successful track record will work in your favor, especially if you have done business with the lender before.
For existing businesses looking to expand, a lender will want to see detailed financials from you, at the very least, and possibly a business plan, as they would for a startup. It’s all about minimizing their risk and maximizing their chances for being paid back. Be prepared to state how much you need and exactly how you plan to use it, along with the impact the additional funds will have on the business.
To Purchase Real Estate
This may be related to growth, or you may simply have decided it’s more advantageous for you to own a place rather than lease. Most likely, you won’t have enough cash on hand to buy something outright. Real estate financing will usually be in the form of a mortgage rather than a business loan. Typically, mortgages use the property as collateral, but you will still have to qualify just as you would for a personal mortgage, and your business and personal credit histories are very important.
A personal guarantee may be required, and you’ll have to submit financial statements, tax returns, construction plans and specifications, if applicable, and possibly even resumes of your management team.
To Purchase Equipment
If your business requires specialized or expensive equipment or machinery, you have the choice between leasing it or buying it. Each has its distinct advantages, but some companies decide to buy because of certain tax write-offs. It can pay, especially if it’s the type of equipment that will last a long time and won’t become obsolete. Most business loans for equipment are intermediate term loans for 10 – 15 years, so you’d have to do a cost-benefit analysis to decide between buying and leasing.
Occasionally, you might need some money just to tide you over. Perhaps you need to beef up your inventory in advance of a busy holiday season but don’t have the cash flow to cover it. Maybe you’re mounting a major advertising campaign and need to pay for commercial production and TV time. In both instances, you anticipate that the revenue generated by the expenditure will be profitable, but you don’t have the funds available. A working capital loan can help you accomplish these short term goals to bring in more revenue down the road.
If you have assets to use as collateral and good credit, you may be a candidate for a working capital loan. Alternatively, a line of credit that you dip into when and if you need it might be an option. A line of credit also has the benefit of being immediately available once you’ve been approved, good for when you need money in a hurry.
Before You Borrow
All of these are valid reasons to seek financing for your company. To see if you’re ready, answer the 10 questions posed by Entrepreneur Magazine. If you decide to proceed, remember not to overextend yourself, and be sure you fully understand all of the terms of any proposed agreement.