6 Things to Consider for Small Business Borrowing

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6 Things to Consider for Small Business Borrowing


Small Business Borrowing and Things You Should Consider

Should I expand? Can I afford more rent at a new location? Can my business support more staff?

As small business owners, we have asked ourselves the same questions and also helped many companies work through the decision-making process to determine the right time to borrow and how much to borrow to buy equipment, real estate, technology or invest in human resources.

Smart business borrowing at the right time can ignite your business to take it to the next level.  Unfortunately, we’ve also seen entrepreneurs make some common mistakes that can jeopardize their company’s future and destroy it.

If you have been considering borrowing, these tips can help you decide if the time is right for you and whether you are have everything ready to meet with a lender.

1. Reason for Borrowing

Understanding your cash flow and the reason for the need to borrow is your first step.  Does your business have a budget for capital purchases? If it has not been used up and the profits have been where expected, sometimes it makes sense to purchase rather than borrow.

2. Borrowing for Equipment Purchase

Are you borrowing to purchase equipment? If yes, you may want to consider leasing vs purchasing.

An equipment lease can be obtained relatively easily for small purchases and equipment. For that reason, consider the length of the lease, interest percentage and buy out values at the end of the term should be analyzed.

3. Borrowing to Purchase an Asset

When borrowing to purchase an asset, consider the useful life of the Asset.  If you borrow to purchase an asset make sure that the item is going to last for as long as your payments do.  When you get stuck at the end of a loan or lease paying for something you no longer have it will seem like a waste or funds each month.  Work with us to analyze the benefits of a shorter repayment term.

4. Funding Document Preparation

Your bank or lessor will want to see current financial statement as well as prior year figures to establish the viability of your business. The majority of lenders want to see a certain EBITDA ratio (Earnings before Interest, Taxes, Depreciation, Amortization).  Lenders seek the ability to repay your loans. Your business must have profits to repay business loan and commitments. We can help with your Funding Document Preparation for small business financing.

5. Financial Health of Your Business

How healthy are your Receivables vs. Payable?  What is your Debt Ratio? If your ability to pay your vendors outweighs the funds coming in from your customers, you are often in financial trouble.  Looking at these reports when reviewing your monthly financial statements is crucial to cash flow and forward planning and a prospective lender will analyze these items when you approach them for business financing.  If your business is seasonal, special consideration should be pointed out for peak business times in your presentation to your lender.

If your books are in a mess, we can help you with your bookkeeping before you go see a lender.

6. Return on Investment

Will the cost of borrowing be offset against improved efficiencies or increased revenues?

If a piece of equipment that you need will cost $800.00 a month and allow you to produce 1,200.00 a month in extra revenue or reduce costs by $1,200.00 this is a smart move.  If on the other hand the 800.00 per month loan or lease only brought you $600.00 in extra revenue or reduced costs, then you will end up carrying the item you purchase. Understanding how your debt can help or hurt you allows you to make great business decisions.

If you still have questions, we have answers. We have plenty of experience in helping business owners prepare for loans and financing. The right details and packaging can go a long way in securing the best terms.

Contact us for a free consultation to review your financial health and ability to borrow.