Although our company specializes in helping business owners find the appropriate financing for their businesses, we know that sometimes financing isn’t the right path to take.

In fact, borrowing money can sometimes cause more harm than good, which is why it’s important to have a detailed thought process before applying for financing. 

If you’re a small business owner and considering borrowing money there are several things to consider.

Is there a fundamental issue with my business? This is not an easy thing to think about, but sometimes there’s a bigger problem that needs to be addressed. 

Look at both your fixed and variable expenses and determine if there are any adjustments that can be made. Take a deep dive into your profit margins. Maybe you’re underpricing? Inflated expenses and underpriced business is a double whammy! This is a very important first step because a business loan won’t solve this issue. It will just prolong it and make it a bigger problem down the road. 

What’s causing you to look for financing? Sometimes getting to the root of the problem can avoid you needing to take on the responsibility and expense of a business loan. 

For example, we often speak with B2B companies looking to borrow money to help bridge the gap between their payables and receivables. It’s common for suppliers to offer 15 to 30 payment terms, but it’s also common to have to offer 45 to 60-day terms to your clients. When this happens, there can be a 15 to 30-day cash flow gap that needs to be filled. This can be filled in a variety of ways, but many business owners think first about invoice financing.  But, can you collect on your receivables faster? Can you negotiate longer supplier terms? If you offered your clients a discount to pay early, would they? Digging deep might help you avoid financing entirely which can save you time, headache, and money in the long run. 

Are you looking for financing because your company is growing and you need to fuel that growth? This is a great situation to be in! 

When you’re borrowing money to grow your company, figure out how you’re allocating the capital that you’re borrowing and make sure it’s a sound investment. You need to have a strong business plan if you are going to make the commitment to take a business loan. Remember, if you’re going to use a term loan then you’ll be paying off your loan for multiple years, which means you need to have an ROI to cover both the interest and amortization of the loan. 

If you are looking to use a line of credit, keep in mind that your bank is going to review your line of credit on an annual basis. There’s always risk that your bank decides they no longer want to provide financing, which is why you have to align your plan to the terms of the financing that you use. 

In some cases, there’s a quick and temporary need for capital to solve a time sensitive situation. There may not be a need for you to take a deeper dive into your business, but you should look into how you solve these situations in the future.

At the moment, you might need to use a quick business loan program that requires limited documentation and a fast turnaround. However, these situations can be avoided by having a standby line of credit available to you. This is where you should be proactive and look for money when you don’t need it. The more prepared you are, the better your terms for financing will be.