Business Solutions Center
Business Columns

Home Resources Business Columns Small Business Finances - Rich Best Rules to Follow When Borrowing Money For Your Business

Rules to Follow When Borrowing Money For Your Business

Small Business Finances �Rich Best
Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.

Rules to Follow When Borrowing Money For Your Business

Rules to Follow When Borrowing Money For Your Business

After a long hiatus in the aftermath of the financial crisis, small business lending has started to perk up. The conditions are much better for obtaining financing, but the rules have changed. Banks and other lenders are more willing to lend than they have been for several years, however, they have also raised the bar for small businesses looking for consideration. In order to get the attention of small business lenders, much less a loan approval, you need to thoroughly understand the new rules when borrowing money for your business.

Prepare a 5-star business plan Long before you need capital, you need to prepare a business plan that will convince lenders that you know what you’re doing. Your business plan needs to overwhelmingly convince them your venture can make money and safely return their investment with interest

Think beyond year one. Think about your business’s cash flow needs in the first several years. It’s better to get all the cash you need upfront, rather than having to secure additional funds every year to stay afloat. Calculate the amount of capital you’ll need to get off the ground and growing and then build a business plan to justify it.

Look for lenders who specialize in your industry. There are many banks that specialize in lending to a particular sector (i.e. online retailers, diet supplements, fashion, etc). Lenders that specialize in your [market segment] will have more confidence in lending to you than those who may not be as up-to-date on your industry.

Pursue different sources for capital. Even if you’re sure you’ll get capital from one of your sources, make sure to shop around for additional sources. You may need them in the future, even if you didn’t need them today. You should consider a Small Business Administration (SBA) loan, angel investors, bank investors, private equity groups, and private institutional lenders.

Tell both sides of your story. Be upfront about the opportunities and risks you see in your business. By not listing the risks of your business, you run the risk of people thinking you haven’t identified them. There are always risks in starting/growing a business – most investors know this and accept it. What they won’t accept is a CEO who can’t identify the potential risks of the business they’re about to start. If one can demonstrate they can identify and plan for risks, they’re much more likely to overcome them, and be a safer investment.

Put yourself in their shoes. For a lender or investor considering committing their money towards something, it all boils down to one question, “am I going to make money, or lose money, on this investment?” Put yourself in their shoes and tell them exactly how and why they’re going to make money by investing in you.

Prepare for the best, the worst, and something in between. Plan for what you’ll do if you raise the capital you need, but also prepare for scenarios where you might come up a little short. Between now and the time you get your cash circumstances may change in the market or your targeted loan terms, such as:

    • Interest rate changes
    • Amount of money they’re willing to loan
    • The time in which they require payment
    • Types of capital available

The Boy Scout motto of “be prepared” rings ever true in business. Create plans of attack should lenders not be willing to give you the exact terms you require. Once the money is on the table, you don’t want to get caught unprepared and have to make a decision without adequate time to do your due diligence.

The information included on this website is designed for informational purposes only. It is not legal, tax, financial, or any other sort of advice; nor is it a substitute for such advice. The information on this site may not apply to your specific situation. We have tried to make sure the information is accurate, but it could be outdated or even inaccurate, in parts. It is the reader's responsibility to comply with any applicable local, state, or federal regulations, and to make their own decisions about how to operate their business. Nationwide Mutual Insurance Company, its affiliates, and their employees make no warranties about the information, no guarantee of results, and assume no liability in connection with the information provided.