The prospect of starting a business is exciting, no doubt about it. Financing an entrepreneurial dream, however, is another matter entirely. Taking out a loan is not something to be done lightly or without careful consideration. There are pros and cons to weigh before signing on the dotted line and agreeing to incur debt, so be sure you are equipped with the facts to make an informed decision before committing to a loan for business financing.
Be Prepared, Informed and Equipped
Regardless of who your potential lender is — personal friend or family member, institution or shareholder group — be sure to give careful thought to your business’s specific financial needs, available collateral and repayment ability before making your pitch. It may sound obvious, but these are questions you will be asked, and providing thoughtful, well-considered answers is an absolute must.
Additionally, your prospects for business financing through a lender will be greatly increased if you come to the conversation armed with the required information. You would be surprised at how many well-meaning entrepreneurs skip the crucial step of drafting a business plan. Remember, if you haven’t thought everything through and laid out a plan of action, your loan officer will question why they should bankroll your vision.
You will also want to have on hand three years of tax history and business reports detailing profit and loss, a well as minutes or other documents showing approval by any governing bodies of your enterprise for pursuing the transaction, if appropriate.
Finally, be sure to come clean if there are any skeletons in your business closet. If your company has at any time filed for bankruptcy or has been involved in litigation, now is the time to make your case, while you have control of the message. If you don’t share challenging information up front, you can be sure it will come out later, and a borrower who has withheld damaging facts from a lender is no longer a credible risk.
Ask the Questions, Get the Answers
There are different types of loans and, depending on the lender, you may have options from which to choose. Do your research, read the fine print and ask a lot of questions to ensure the product and terms you are agreeing to are the best available for your situation and resources. Be sure to consider the borrowing fees you will pay, closing conditions, interest, late fee and default guidelines, warranty and covenants, as well as the responsibilities and liability of all guarantors and co-signors.
Shake on It
When all is said and done, there are definite advantages to utilizing a loan to finance your enterprise. Note that consistent, timely payments not only keep you in good standing with your lender and keeps your business moving forward, but it can also improve your credit score. With the proper planning, due diligence and a good understanding of the risks involved, debt can be used to your advantage for business financing, and it can be that needed boost for advancing your company to the next level.