There is a great deal of advice for securing a business loan for a company that's just getting off the ground. But what's less frequently discussed is what an owner should do for financial help long after the initial setup.
For many owners, a business loan might mean the difference between surviving and having to abandon the organization. To get to the bottom of this issue, I spoke to Duran Inci, co-founder of marketing agency Optimum7, and Dan Robbins, chief operating officer of skincare company OC Facial Care Center
Inci and Robbins both have business loan experience. Inci obtained a Small Business Administration loan as well as a separate credit line for his consulting business.
“I wanted to have options in terms of growth, additional marketing, hiring and scalability," he explains. "I believe that businesses should start looking for loans not when things are going bad, but when things are going great."
With the common saying “Banks lend when you don't need it, and don't lend when you do" in mind, Robbins applied for a loan while his business was in good shape.
“We'd been paying in cash for store expansion, inventory and all other business aspects," he says. “But last year, I heard [a judge on Shark Tank] suggest taking out loans while holding cash so you can protect your ability to pay interest and keep the the loan afloat, and I immediately changed my way of thinking. I realized that if something bad was to happen and I had no cash, it could destroy our business."
Convincing Banks to Take a Chance
As a result of the recent financial crisis, many banks have gotten stricter about how and when they lend. “You're much better working with a local or smaller bank with which you already have a relationship," says Robbins.
Many lenders will want to review your business model.
“Banks want to be sure you have the ability to pay back or you have collateral," adds Inci. “They are very specific about the terms as well. At the same time, if you have good revenue and decent financials, it's not hard to get a business loan."
If an owner decides to pursue a business loan, what should they be prepared to do to convince financiers? Both Inci and Robbins say that demonstrating transparency to the lender, with the help of a good accountant or bookkeeper, can help.
“Your cash flow and the profitability of the business should look good," says Inci. “Furthermore, the debt to income ratio should not be alarming. If you feel like the terms and/or interest rates are high with private lending, SBA loans are better in this respect. However, you should expect higher initial fees."
On the whole, business loan interest rates are comparatively low.
“If you can take out a loan now and save your cash flow and profit, it's better," says Inci. “Additionally, building that lending relationship today will be more impactful later when you might actually need the loan."
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