Article Summary: It's not uncommon for small business owners to wait until a need presents itself before they start looking for a small business loan. Taking a more strategic approach, or strategic borrowing, can help forecast business needs and allow a business owner to anticipate the need for business financing.
The value of looking ahead to anticipate short- and long-term capital needs can't be understated. It will also help you make sure your business credit profile will help you qualify for a loan. There are a few things you need to consider as you try to be more strategic about your financing needs:
- Identify your potential capital needs and when borrowing might make sense
- Determine how much capital you're going to need
- Regularly monitor your personal credit score and your business credit profile
- Keep your options open—don't automatically discount financing options that are unfamiliar to you
- Be prepared to talk about the health of your business with a potential lender
Taking a more strategic approach to borrowing might not be a guarantee your loan application will be approved, but it will help you plan enough to put your best foot forward and improve the odds. Keep reading to learn more.
Increase Your Loan Options with Strategic Borrowing
Without adequate capital, it’s difficult for small businesses to grow and thrive. This is true whether you fund your business through cash flow, investment, or borrowing. Taking a strategic approach to meeting your business’ need for capital to fuel growth and fund any other ROI-generating activities will ensure you have the capital you need throughout the year.
Looking strategically at your need for capital, both short-term capital needs and long-term needs, requires you to look ahead and gauge your needs for financing. This is particularly true if you leverage borrowed capital to fund these initiatives because it will help you maximize the value of every dollar you finance.
Borrowing to Address Short-Term Capital Needs
The nature of filling short-term needs like purchasing inventory, repairing equipment, or bridging a seasonal cash flow hiccup are decidedly different than meeting longer-term needs like purchasing expensive equipment, adding a new business location, or meeting other high-dollar financing needs. In much the same way you might scrutinize and plan for the purchase of an automobile or a new home when compared to using a credit card at the gas pump, it’s important to consider and anticipate the different types of financing needs your business will likely encounter during the year and plan accordingly.
For example, it’s not uncommon for a supplier to offer a one-time special discount to their best customers who can act quickly—creating what could be an unexpected short-term need for capital. Being strategic about what you finance and when can make it easier to access credit for opportunities to increase ROI when opportunities arise; because taking advantage of such opportunities could be part of your strategy.
The Value of Looking Ahead
At roughly the halfway point of the year, it’s a good time to look forward at the next six months to try to anticipate your needs for capital. It might be difficult to anticipate every need, but here are five things you should consider as you build out your strategic plan for the next six months:
1. Identify your potential capital needs and when borrowing might make sense:
Being deliberate in when and why you borrow is a good first step. If borrowing make sense, identify your loan purpose (or reason for borrowing) because it will help you make important decisions regarding how much to borrow, what type of costs make sense, and how will borrowing impact the ROI of any particular initiative. For example, borrowing to take advantage of quick-turnaround inventory to meet holiday demand, and directly impact profitability, will help you determine what cost of capital makes the most sense.
2. How much capital do you really need:
I’ll admit, I’m a pretty conservative guy when it comes to borrowing. Because there are costs associated with borrowing, regardless of the lender you choose, borrowing more than you really need just doesn’t make sense. Taking a strategic approach will keep you focused on the business need, the potential to either grow your business or increase your profitability, and help you choose the lender that makes the most sense for your particular situation.
3. Keep tabs on your personal credit score and business credit profile:
For most small business owners, the need to maintain a good personal credit score will never go away. But, you can’t stop there. It’s also important to maintain a strong business credit profile. Make a regular review of your credit profiles (I’d recommend monthly) a part of your strategy. It will give you an opportunity to understand where it’s weak and give you time to take action to make improvements. Although there are no shortcuts to improving a bad profile, you might be surprised at how quickly taking regular, consistent, action will start to push your profile into positive territory.
4. Keep your options open:
Because access to capital is such a critical part of business success, don’t automatically discount options that are unfamiliar to you. While the bank has traditionally been the place small business owners’ have turned to for financing, many business owners are finding other options, like online business loans, are a good fit for their loan purposes. If you find a lender you think you like, check them out with the Better Business Bureau and other review sites. You should also ask to speak with a current customer or two.
5. Be prepared:
In other words, have the information you might need to make a loan application available at your fingertips. Not all lenders require the same information, but regardless of whether your lender requires it, it’s a good idea to be familiar with your income and expenses, your profit & loss statement, have easy access to your tax ID number, your business license, and the last six months worth of bank statements. I once spoke with a lender who said, “If I understand more about a business by looking at the numbers than the business owner does, I’m not going to approve their loan request.” If there is a financial report or metric you aren’t sure you understand, ask your accountant or other financial advisor to explain it to you so you do.
Taking a strategic approach to borrowing isn’t a guarantee you’re loan request will be approved, but it will help you determine when borrowing makes sense, help you prepare for a loan request in advance, and likely give your business additional options you might not otherwise have. Strategically evaluating your capital needs will help you strengthen your application and overcome any challenges that might otherwise keep you from qualifying for a loan.
Looking at your business plan for the rest of the year is a good time to evaluate where you are, your needs for the next six months, and make a plan to achieve them.