Growing a business requires a steady flow of money.
Building a business costs money—usually more than you can generate from your operating revenues.
Whether you’re adding a new truck to your fleet, building a new housing development, or creating software, you’ll need money to turn these plans into reality. It might help to work with an accountant to calculate estimated costs for reaching the next level of development.
Before you borrow, list your basic business expenses. Each time you expand your business, these costs are likely to increase:
- Employee salaries
- Electricity, heating, air conditioning, and fuel
- Paper and other office supplies
- Purchasing or leasing operating equipment
- Decorating or remodeling costs
- Legal and professional fees
- Machinery and power tools
Bank Loans 101
If you’ve made the decision to borrow money for your business, which loan is right for you?
You can get a line of credit, which is a type of loan that gives you short-term or seasonal funds. Basically, a line of credit is very similar to a credit card, with the notable exception that interest on a line of credit is lower and may be tax-deductible. You borrow cash, using your business assets as collateral, and pay back the principal and interest on any outstanding balance each month.
A long-term credit loan usually lasts up to five years and is helpful if you want to have money for operating costs until your business turns a profit. Banks typically require that you provide collateral or sign a promissory note on this type of loan, and pay it back in installments.
Do You Qualify?
If you’re thinking about taking a loan to build your business, there are several qualifications that banks and investors normally expect from you, as the owner, and your business. Before you apply for a loan, make sure that you can provide potential lenders with the following:
- Business plan
- Balance sheet and income statement
- Cash flow projections
- Profit and loss reports
- Personal financial statements for all business partners
- Credit report
- Personal income tax returns
- Information on business debts
Getting the Loan
You may want to investigate banks that have a history of offering loans to small and growing businesses, since there are banks and credit unions across the country known for being friendly to small businesses.
It’s good business practice to have a strong relationship with a bank or banker, especially since she or he could help you get loans when you need them. If you don’t use one particular bank, you might want to open a business banking account or secure small lines of credit before applying for a big loan.
All potential lenders will probably ask how much you are investing personally in your business venture. Among other things, it’s a way to assess your commitment to the business
All potential lenders will probably ask how much you are investing personally in your business venture.
Among other things, it’s a way to assess your commitment to the business.
A Little Help
Since 1993, the Small Business Administration (SBA) has extended Microloans to businesses to help finance machinery, office space leases, equipment, and other basic necessities.
The most you can borrow with a Microloan is $50,000, and the average amount that borrowers use is about $13,000. Although the term of the loan depends on what you’re using the funds for, and the size of the loan, the longest term for a Microloan is six years.
The SBA can also help you create a loan package and secure funds through a program called Lender Match. You can qualify for the loan if your business qualifies based on SBA standards.
For more information, go to SBA.gov.