Supporting your dreams in life

Borrowing Money for your Business

Cash flow is an essential aspect of business operation. Shortage of cash when you need to operate a business can be frustrating and gets you distracted from focusing on a smooth operation. More often business success and cash shortages sometimes go together. Just make sure you can pay your bills, and only cash does this. Profit is an accounting measurement but cash is it. It is reality. So make it a point that you understand and know how to control the cash flow in your business.

A business can still be profitable with tight cash, yet a company with free flowing cash can also be in serious trouble. Distinguishing what is profit and what is cash is vital to an entrepreneur’s knowledge. When you borrow money, it may boost your cash balance, but be reminded that you will be paying an extra expense by paying the interest of what you owe. And if you are late in paying during its due dates, penalties and interest could pile up; thus eating away your profits and draining down your cash. Careful planning in the engagement of any business transaction saves you from the pitfalls of failure.

Borrowing money for expansion or other things can really disturb the traditional relationships between cash and profits. Lay out a plan and an accounting system well enough to give you a full picture of your operation. What you need for your business, how much cash is needed for your operation, where the cash are coming from, and the projected outcome of your venture. Be careful with the figures and track your input and output with organized scrutiny. Ask yourself questions if such move are feasible and if it does not work, what is your plan B, C, or D. Always use a cash flow statement, learn how by doing your homework and research.

When you know you need money to operate your business to a level that promises profit, you will know how much you need. A proper summation and accounting will show the figures and tell you why  you need such amount. You have laid out your paperwork and the numbers in your paper shouts at you. Before going to a bank, find funding in these areas first:

1. Friends, Relatives, Individuals – you may give them a reason why it is right for them to lend you money. You may go into limited partnership with them. Hand them your proposals.

2. Consider bartering skills and services

3. Loan some equity from your house if applicable.

4. Sell something what you have that you are willing to let go.

5. Borrow from your pension funds or insurance.

6. Seek advice and help from Private Foundations

7. Go to venture capitalists

8. If there are Small Business Investment Companies you find, approach them

9. There may be some State Government Financing Sources in your area

10. Consult your Small Business Office

There are different types of loans for business. They are: Short-term loans are temporary loans which are usually repaid in lump sum. It is paid within a year and the money is used working capital. Intermediate loans are intended for start-up capitalization. It is payable within three years and the money is used to purchase equipments or for expansion to be used as working capital. Long-term loan are payable within five years and used for business start-ups, to purchase big items for business use such as fixed assets or for major capital improvements. Lines of Credit are revolving loans, reviewed yearly. You take money for operational use and pay it back within a month.

The tedious process of applying for funding can be rewarding as well. The documentation must be in place so that the one checking your paperwork can customize you business need. Be prepared and be as detailed as you can be. A well thought-out proposal saves a lot of time for both the lender and you. It must clearly state the purpose of your loan. How much money you need and when are you planning to pay it back. Here is a list of business proposal contents:

1. Describe the nature of your business. What is your product and market. Who are your customers and your competitors.

2. Outline your business know-how about this business, your experience and those of your partners. Present a credible resume for all involved in the loan.

3. State the type of loan you are requesting. What is the purpose. Will it be for working capital, to buy equipment, of expansion.

4. State the amount you need to borrow. When are you planning to pay it and outline the re-payment schedule.

5. Present the Business Plan of your company. Business Plan is the first paperwork to be prepared as we have talked in the previous chapter. It states about your business strategy planning for the next three to five years. This will aid you and the lender if your business is feasible to provide cash flow to your operation, and if it has the capacity to repay the loan.

6. What is your structure of repaying the loan. If your loan is Short-term, Intermediate, Long-term, or a line of credit.

7. Other documents such as your license, tax account information, articles of incorporation, partnership agreements, business banking information, history and business activities such as receipts, invoices, and other pertinent documents that can be helpful to show to the lender about your business.

8. Usually collaterals are required to secure the repayment of the loan. It may include inventory, equipments, automobiles, savings, accounts receivables, and whatever you could think of.

9. Present your financial statements, both business and personal. They usually ask for the last five years of operation containing all the activities of your finances; assets and liabilities, profits and loss, both personal and business tax returns, credit references, your business projection, and other information regarding your credit worthiness. If you are starting a business, present your personal financial information and your proposals.

10. Lenders always require borrowers for personal guarantees. If you have co-signers or partners, they would require from them this paperwork as well. Secured credit in which you a conjugal property is used as collateral, both will have to sign the documentation.

The need for financing is a critical issue to be considered. Business owners will come to a point to look for credit market in financing. Applying for commercial credit are customized process and more complicated than consumer credit. The banking industry requires a great deal from the borrower. You may need to seek advice from others who have experienced in this kind of funding resource. There are some business support group networking that gives counseling if you do really need to borrow or not. Most banks are conservative in their procedure and you find yourself in a position of being rejected. Obtaining credit can be a difficult process especially for first time borrowers.