Do I Need a Loan? by Olivia Goodheart

Carefully consider not getting a loan. Remember, a loan is debt that you will have to repay.

Carefully consider not getting a loan. Remember, a loan is debt that you will have to repay.

The financial health of your business is paramount to its success. First, before considering a business loan, you must have a very clear picture of the fiscal status of your business.

If you use accounting software, review your profit and loss reports. You may also want to review the past six months of your bank statements. If you are in sales (retail or wholesale), were you able to cover all expenses and turn a profit? If you are in a service business, take a look back at your last dozen or so projects; and ask yourself the same question, were you able to make a profit?

A loan should be for a specific purpose. Some typical scenarios might include:

  • Adding new staff (short-term or long-term; part-time or full-time) to help manage new business or assist with a special project.
  • Purchasing equipment or specific supplies to service additional business or to service current needs more cost-effectively (i.e. a color printer to save on the cost of color copies).
  • Covering operating costs during your “slow revenue” business cycle.
  • Purchasing inventory to take advantage of special pricing opportunities.

Carefully consider not getting a loan. Remember, a loan is debt that you will have to repay. You may be able to cut expenses, delay some purchases, and revamp operations procedures and policies to run your business on bare bones. Set a goal to do this for three months and see if you can manage without getting a loan.

Some Resources for Loans

If you determine that a loan is necessary, you can tap into these potential resources before going to your banker:

  • Personal credit (be sure you know the interest rate; penalties for late payments). It may be a good idea to consider for a very short term loan if you know 100% you will have the income to cover repayment in a timely manner.
  • Retirement plan/savings (be sure to review penalties that may be associated with any early withdrawal).
  • Home equity loan (rates may be reasonable; be sure you aren’t jeopardizing your major asset).
  • Family and friends (develop a written letter of agreement stating how much you will pay back; when you will pay it back; and what interest you are willing to pay). Be sure you are willing for a family member or friend to tell you “no” before you ask. Also, honor any agreement faithfully. This type of loan obviously creates a risk of damaging the relationship, so proceed with great caution.

For a larger and longer term financial situation, you may want to consider an SBA (Small Business Administration) loan. You can visit their website to find an office location near you. The SBA has counselors who can meet with you to assist with the process. Additionally, most banks have a small business division or manager who can give you guidance.

Take a proactive approach to your financial health and establish a line of credit. This is a resource you can tap into if you need it. Most operate like a revolving charge account. You only pay against the amount you actually use, not against the full amount. The business may have to provide collateral; and you may be asked to serve as personal guarantor.

Don’t be afraid to make an informational appointment with your banker or with a CPA who specializes in small businesses. In a one-hour appointment, you will find out what you need to do to be considered “credit worthy” by your financial institution. Such information can help you prepare for taking out a business loan or shaping your operations so you can avoid the necessity for a loan altogether.

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