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Borrowing Money for Your Business? Be Strategic.

Borrowing Money for Your Business? Be Strategic.

It doesn’t matter what size your business is, fueling growth and maintaining a successful and thriving business often require borrowed capital. With that being said, borrowing money at the wrong time, borrowing for the wrong reasons, or borrowing the wrong amount can cripple or even ring the death knell for your business.

Money Isn’t Always the Answer

Popular media would have us all believe the answer to every small business problem is additional cash. Popular as this opinion might be, I don’t believe that’s true.

For example, the real value the Sharks on ABC’s Shark Tank bring to the equation is less about the money they can offer a business. Instead, it is more about the connections, experience, and industry-savvy they bring to the table.

In other words, you’ll need connections, experience, and savvy in your industry to be successful. And you probably won’t need a Shark.

In fact, most of the successful businesses I know haven’t had access to an Angel like one of the Sharks. But they have leveraged their experience and creative problem-solving skills to earn their place in the market. Consequently, they have managed to deposit profits into their bank accounts.

Many business owners start their entrepreneurial dream with plenty of experience and savvy. But many others jump in with both feet willing and ready to learn as they go. Unfortunately, most lenders don’t want to pay for their learning experience. So, it’s very difficult for an early-stage business to qualify for a small business loan.

Don’t Forget, Borrowing Money Is Expensive

Regardless of whether you are able to qualify for relatively inexpensive financing guaranteed by the SBA or use other borrowed capital, there are costs associated with a business loan that can’t be ignored and should be considered before you literally, or figuratively, sign on the dotted line.

I’m convinced there are really only a couple of good reasons to borrow, and every loan consideration should be measured against these criteria.

Let me explain. My small business career started sweeping the floor of the warehouse in my father’s small business. And my attitude about borrowing has been influenced by those early days of my career. Granted, these opinions might be a little more conservative than most. But measuring your need for borrowed capital against these criteria will help you avoid crisis, or reactionary borrowing and help you leverage borrowed capital as a tool to build a successful business.

Ask yourself these two questions before you borrow:

Am I Borrowing to Increase the ROI of a Project?

There are a lot of times when an opportunity to increase profits presents itself to a small business owner but will require additional capital that might not be available through cash flow or business savings.

A good example of this would be an opportunity to buy quick-turnaround inventory at a steep discount if you can act quickly to purchase in a larger quantity. If the cost of financing allows you to reap additional profits, or capture additional market share, this can be a powerful use of borrowed capital and enable you to build a stronger bottom line.

Am I Borrowing Money to Increase the Value of My Business?

A new location, equipment, or anything else that will add value to your business could qualify. A restaurant expanding with an outdoor dining area could be one example. A merchant adding a new location across town might be another. Adding value is a little more vague than adding ROI, but is still a legitimate reason to borrow.

Of course, there may be times when a need for extra cash doesn’t fall into one of these two categories, like a cash flow shortfall at the end of the month, but those should be the exception rather than the rule.

If you find yourself regularly borrowing to meet a payroll shortfall or meet some other crisis, you could literally be borrowing your way into bigger problems. And, unfortunately, there are predatory lenders out there that will help you do it.

If you’re not borrowing to increase value or boost ROI, make sure you really need to borrow and there isn’t some other way to meet your needs.

What Is Strategic Borrowing?

When I refer to strategic borrowing, what I’m talking about is anticipating needs and making sure a business is proactive in meeting them—when borrowing might be anticipated. I understand that many entrepreneurs tend to make a lot of decisions on the fly. Because of the costs involved, I don’t think this should be one of them.

Sitting down to plan for and anticipate the ebb and flow of the coming year, taking time to consider initiatives that might require extra capital, and honestly evaluating the ability to successfully apply for a loan is the first step. A more reactionary approach could mean the rejection of a loan application and a lost opportunity.

Abraham Lincoln said,

If I only had an hour to chop down a tree, I would spend the first 45 minutes sharpening my axe.

Strategic borrowing is all about sharpening the axe.

Are You Ready for Borrowing Money?

Lenders want to know that you’ll be able to make periodic payments and that you will. This is why your track record is so important.

As you evaluate your ability to qualify for a loan, recognize the correlation between how easy it is to qualify and how expensive the financing will be.

Yes, if you have a 650 personal credit score (even a lower score), haven’t been in business for very long, and don’t have a strong revenue history, there is financing available, but it will be more expensive than a better-qualified borrower.

The earlier you start thinking strategically, the better. While you might not be able to do anything about how long you’ve been in business you can start taking actions to improve your credit profile today. I say “profile” because your personal score and your business credit history synergistically work together. What’s more, building and maintaining a strong profile should always be on your agenda.

About Contributor 

Ty Kiisel is working as content director at Nav. His company can help you find the best possible financing for your current situation. Nav can also help you prepare for a better loan in the future.

 

Smart Hustle Resources:

Money Hunt: How 4 Smart Hustlers Found Money for Their Startups

5 Things to Consider Before Applying for Additional Business Financing

5 Popular Types of Alternative Financing for Small Business

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Source: Smart Hustle