Getting a business loan is like anything else, it can be done the right way or the wrong way. Most new entrepreneurs will admit they could use some extra cash to start, build, or grow their businesses and the vast majority of them will not hesitate too long about taking the first loan offered to them. So before we talk about jumping at all the easy money being passed around out there in the business world,(yeah right), let’s talk about good money and bad money. There are thousands of people looking for money for their businesses but many business owners don’t seem to borrow money for the RIGHT reason or the RIGHT way.
Are you going to use the funds borrowed for the right reasons? If you’re not going to spend your money for production or marketing purposes, you may be on thin ice. If your company’s products are selling great and you know there are areas that you can improve with new technology or a little innovation, then you can probably justify the financing. If the cash-flow of your business is interrupted or distressed because your new loan or line of credit comes with payments that are hard to service each month, you should think twice before signing those papers. If you use your funding for the right reasons and you execute your plan, then you’re heading down the right path. Here is where having a professionally written business plan, that details your ideas and goals, will be your best map for keeping you focused and on track.
There are a few goals you should try to accomplish when you do borrow money for your business. It may go without saying, but, look for the the most reasonable monthly payment since the monthly payment is what will impact your cash-flow. Remember that cash-flow will keep the doors open for business but profits will generate a better life for you, your family, and your business.
Maintain your excellent personal credit by keeping loans and lines of credit under your business and keeping them off your personal credit report. Even though you may have signed a personal guarantee as the owner of the business, those loans and lines of credit, if they are properly originated by the lender, should not show up on your personal credit unless you got behind on the payments.
Savvy business people make sure to read everything or have an attorney do it. These folks aren’t looking for mistakes or “gotchas” hidden in the paperwork, they are locked in on maximizing your tax benefits. Keep in mind that using personal loans and credit cards will ruin any chance of feeling good about your interest rate or tax benefits.
Remember, we are only discussing borrowing money or creating debt. We are not looking at equity solutions like venture capital, angel investors, private equity, etc. Equity means giving up ownership in your business and is almost always more expensive than forms of debt like loans and lines of credit.