Building a business costs money—usually more than you can generate from your operating revenues alone. Securing the funds you need will require careful planning and preparation.
Whether you’re a fully operating business looking to add a new truck to your fleet or build a new location, or if you're just starting out, you’ll need money to turn your 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:
One option to increase your funds is to 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. Lenders typically require that you provide collateral or sign a promissory note on this type of loan and pay it back in installments. Of course, you should always be wary of getting into unnecessary debt or borrowing more than you can afford to pay back.
Visa, American Express, and Mastercard all offer credit cards aimed specifically at small businesses. These cards offer lower interest rates than normal credit cards, and often have higher credit limits.
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:
You may want to investigate banks that have a history of offering loans to small and growing businesses, since they may be more familiar with your situation and easier to work with.
It’s a good business practice to have a strong relationship with a specific institution, as that could make it easier for you to 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.
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 the size of the loan and what you’re using the funds for, 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.Previous: SBA Loans Next: Keeping Your Employees