5 factors to consider when borrowing for your small business

BY MATT VARILEK

At the Small Business Administration, we are hearing from more entrepreneurs who feel now might be the right time to invest in starting or expanding a small business. Here are five factors to consider when borrowing to start or expand your small business:

1) Do your homework.

Have you prepared your business plan? Are your financials in order? These can be daunting questions, especially the first time you seek business financing. They'll help you make sure your plan clearly expresses who your customers are, why they should do business with you and how you will compete to maintain market advantage and gain new customers.

Your plan also must communicate your expected business conditions, including a practical marketing strategy, and provide projected financial statements. Lenders can usually see through financials that are too optimistic or lack insight. It's best to be candid and openly discuss the value and risks of your business assumptions.

2) Be passionate about your business.

If you aren't excited about your business, there's no way a lender will be. This is the place your sweat equity matters. Have you spent time learning your trade or perfecting your craft and put in the time to show yourself and others that you've found a business you're passionate about? Have you learned how to manage a small business through practical experience or by taking evening classes? Potential lenders need to believe in you.

3) Know your credit rating and use it to your advantage.

Small business owners are successful because of their independence, ideas, passion and drive. But they generally aren't accountants, and as a result they are often unaware of just how important actively managing business credit is to their success. Start by taking a good hard look at your business and personal credit.

If your credit is not strong, work to improve it over time. Strong business credit can help small businesses ensure positive cash flow by securing more financing at better terms. Good credit can ensure that small businesses get financing when they need it. According to the SBA, insufficient or delayed financing is the second most common reason for business failure. For businesses with poor credit ratings, top national banks may increase loan interest rates an average of 8 to 12 percent, which increases overall expenses.

4) Get to know lenders in your local community. Before requesting a loan, find out which lenders in your market make loans to small businesses like yours. Not all lenders specialize in small business loans. Some focus only on firms in certain industries or avoid sectors they consider a high risk. Others are open to smaller businesses or startups, while some prefer to lend to more established firms.

Many lenders also work with SBA Loan Guaranty Programs and will promote themselves as an SBA lender with dedicated staff knowing how best to process and market different products.

5) Have skin in the game, and be prepared to offer collateral.

Lenders want to make sure that you will repay their loan and almost all of them will require you to have real equity in your business. Depending on the bank's policies, this can be from 30 to 50 percent for new and startup businesses. Collateral can consist of assets that are usable in the business as well as personal assets.

You know your business best and applying for a loan can be intimidating, especially for those doing it for the first time, but the SBA and our resource partners are willing to work with you every step of the way. PB

Matt Varilek SBA Regional Administrator, Region VIII matthew.varilek@sba.gov