To borrow or not to borrow?

by Mark Rambler, President, COO and Co-Founder

As the chief operating officer of Credibility Capital, a small business lender, I am often asked, “How can my business get a loan?”  While that question is an important one, I want to tackle a different one here: “Should my business get a loan?”

The first step to determining whether your small business should borrow money is to get your company’s finances in order so you have a clear picture of capital inflows and outflows.  This will tell you how much debt you are able to service month to month. To do this, you’ll want to invest in quality accounting software.  Accounting software provides a snapshot of the health of the business and offers a variety of features from basic accounting tasks to tax preparation – all of which help business owners save time and better manage finances. Business owners can choose from a wide selection of products including QuickBooks, Xero, FreshBooks, Wave Accounting and Zoho Books.  You’ll want to research each to understand costs, ease of use, small business product features, and customer support to understand if it’s right for your business. Business News Daily published a helpful 2016 Guide to the Best Accounting Software for Small Business.

Now that your business finances are organized, the next step is to develop an actionable business plan to determine borrowing needs. For those not comfortable with business planning and financial forecasting, I recommend considering a business planning program such as LivePlan, Biz Plan Builder or Business Plan Pro.  Through question wizards and simple templates, these programs walk a business owner through relevant costs and revenue assumptions to estimate how the business will perform over time.  This will help you determine how much debt funding the company will need over time and, more importantly, how much debt the company should prudently take on.

The final step is to determine why you might want a loan. Based on your financial situation and your business model, loans could help address a variety of needs.  For cash-flow negative businesses, a loan could help fund operations needed to move the business from red to black. For cash flow positive businesses, commercial loans can be used to fuel business expansion across many activities. Credibility Capital borrowers have used loan proceeds to hire additional salespeople for an athletic apparel boutique, to market aggressively to grow their insurance client base, to purchase materials to increase kayak production, to install an outdoor patio at a live music bar, and to bridge a period that would otherwise put the company in deficit territory due to building up a new fleet of cars for a transportation provider.

 If you find that you are in a position to use a loan for any of the above purposes and you have confirmed that you can pay off a loan based on your current financials and future projections, then you can answer YES.  If you do end up borrowing, carefully consider the rate and terms of the loan.  Thanks to your accounting software and business plan, you’ll know exactly how much you can afford to borrow and you’ll have documentation ready to shop around for the best possible deal.