DECIDING WHETHER TO BORROW

If you’re considering borrowing money for your small business, assess your needs and options first.

Would better cash flow handle it?
Look at whether your problem could be solved by improving your cash flow rather than getting a loan. For example, can you get more cash by improving the efficiency of your collections (in other words, how fast your customers pay you)? Or, could you switch to a just-in-time inventory system so that your money isn’t tied up in inventory that’s not needed now?

Create a cash flow projection.
Study your financial situation. In addition to reports capturing what happened in the past, you need to create reports representing your best guess of future results. One key example is a cash flow projection. If you approach a bank to borrow money, they’ll probably want to see your cash flow projection and business plan.

Consider the risks
When you apply for business credit, the lender will probably ask you to sign a personal guaranty. This means that if your business cannot repay the loan, you are legally responsible for doing so. If you can’t, there will be negative consequences for both your business and your credit. So before signing a loan agreement, ensure you understand the terms: interest rate, maturity (the length of the loan), collateral requirements, and the amount the bank is willing to lend. Consider getting legal advice. Be sure that you clearly understand what your business — and you personally — are agreeing to.

Look ahead financially
Consider the likely future ups and downs of your business and how these will impact your finances. Proper planning, monitoring your expenses, and collecting the money that’s owed you more quickly can shorten the periods of time that are financially challenging.

LOANS vs. LINES

Compare the difference between two credit products offered by lenders.

Loan

You borrow a certain amount from a lender and agree to repay it with interest over a certain period. Loans are typically used to make significant, one-time purchases. The lender may ask you for documentation to confirm the cost of what you intend to buy.

Line of credit

A flexible way to borrow money at any time. Helpful for managing cash flow. The bank agrees to lend you up to a certain amount continuously. You can use as much as you need (up to your limit) and pay back at least a minimum amount every month. You pay interest only on the amount you borrow.

TWO TYPES OF SMALL BUSINESS CREDIT

“Secured” credit means the lender knows you have the assets, or collateral, to repay them. For example, to qualify for $1,000 of secured credit, you must provide the bank with proof that you have $1,000 in cash or another acceptable form, such as equipment or investments.

“Unsecured” credit has no collateral attached. This means your assets are not a factor in the loan deal.

Lenders invest in you and your business. Working with a lender who is familiar with your type of business can be helpful.

To learn more, go to https://handsonbanking.org/resources/credit/