February 29, 2012 | Print this Page.

Too often, businesses think they need to borrow money when they shouldn't. And, there are times when it's a good move to get financing, especially when it contributes to growing the business.

A bank approving an application for a loan isn't a sign that a business needs it. All it indicates is that the bank believes the business can pay back the line of credit or loan. That's their main goal. They don't care how it affects your business.

Deciding If Your Small Business Needs a Loan

So how do you know if you need financing? In CEO Blog: Signs Your Business Should Borrow, Brian Hamilton advises asking two questions. If you answer yes to both, then your business may need financing.

Questions to ask to determine financing need:

  • Is your business actually profitable?
  • Can you easily service the debt?

Answering the first one is easy for most. The second question not so much. The article explains how to calculate the debt-service ratio. For extra help, talk to your accountant who will know how to do this.

Did you say yes to both questions? OK, read on before you go running to a bank or a private lender. Hamilton suggests obtaining working capital only if it increases profit. He gives a great example of a business replacing a truck. This lets you maintain your business and won't likely affect profit. Adding a truck, on the other hand, to service more customers is more likely to boost profit.

When people say they need capital to grow the business, many times they mean they need cash flow to stay in business.

Preparing for a Loan

Start gathering your financing information now rather than waiting until your business needs financing. You may need to do a few tasks to make your business more viable to a bank or private lender. And, these aren't quick ones.

Are your business accounting and personal financial records updated? Otherwise, how will you know your company's financial health and personal finance status?

Why personal account information? Banks often want to see a personal financial statement from a small business owner. Updated accounting records help you create an income statement -- also known as profit and loss (P&L) statement -- or create reports like a cash flow statement.

Check your credit report and your credit score for both business and personal accounts. (Check it at AnnualCreditReport.com -- the only authorized source for free annual credit reports. This report covers Experian, Equifax and TransUnion.)

When you receive your credit report, look for outdated or wrong information:

  • Accounts that aren't yours.
  • Closed accounts with a balance.
  • Wrong balance for an account.
  • Wrong dates for open credit accounts.
  • Wrong category for listed accounts.
  • Late payment that occurred over seven years ago.
  • Collection and charge-off activities that occurred over seven years ago.
  • Credit line limits that don't match your billing statement.

Correct any mistakes you find. Here's help from the FTC on how to dispute credit report errors.

If you don't have a business credit record, setting up a business entity and opening a checking account in the company's name is a good place to start. Besides, it's important to separate your business and personal bank accounts. SBA.gov provides steps for establishing business credit at www.sba.gov/content/managing-your-business-credit.

What other ways can you prepare for a loan? What other options do you have for getting working capital or financing?

Too often, businesses think they need to borrow money when they shouldn't. And, there are times when it's a good move to get financing, especially when it contributes to growing the business.

A bank approving an application for a loan isn't a sign that a business needs it. All it indicates is that the bank believes the business can pay back the line of credit or loan. That's their main goal. They don't care how it affects your business.

Deciding If Your Small Business Needs a Loan

So how do you know if you need financing? In CEO Blog: Signs Your Business Should Borrow, Brian Hamilton advises asking two questions. If you answer yes to both, then your business may need financing.

Questions to ask to determine financing need:

  • Is your business actually profitable?
  • Can you easily service the debt?

Answering the first one is easy for most. The second question not so much. The article explains how to calculate the debt-service ratio. For extra help, talk to your accountant who will know how to do this.

Did you say yes to both questions? OK, read on before you go running to a bank or a private lender. Hamilton suggests obtaining working capital only if it increases profit. He gives a great example of a business replacing a truck. This lets you maintain your business and won't likely affect profit. Adding a truck, on the other hand, to service more customers is more likely to boost profit.

When people say they need capital to grow the business, many times they mean they need cash flow to stay in business.

Preparing for a Loan

Start gathering your financing information now rather than waiting until your business needs financing. You may need to do a few tasks to make your business more viable to a bank or private lender. And, these aren't quick ones.

Are your business accounting and personal financial records updated? Otherwise, how will you know your company's financial health and personal finance status?

Why personal account information? Banks often want to see a personal financial statement from a small business owner. Updated accounting records help you create an income statement -- also known as profit and loss (P&L) statement -- or create reports like a cash flow statement.

Check your credit report and your credit score for both business and personal accounts. (Check it at AnnualCreditReport.com -- the only authorized source for free annual credit reports. This report covers Experian, Equifax and TransUnion.)

When you receive your credit report, look for outdated or wrong information:

  • Accounts that aren't yours.
  • Closed accounts with a balance.
  • Wrong balance for an account.
  • Wrong dates for open credit accounts.
  • Wrong category for listed accounts.
  • Late payment that occurred over seven years ago.
  • Collection and charge-off activities that occurred over seven years ago.
  • Credit line limits that don't match your billing statement.

Correct any mistakes you find. Here's help from the FTC on how to dispute credit report errors.

If you don't have a business credit record, setting up a business entity and opening a checking account in the company's name is a good place to start. Besides, it's important to separate your business and personal bank accounts. SBA.gov provides steps for establishing business credit at www.sba.gov/content/managing-your-business-credit.

What other ways can you prepare for a loan? What other options do you have for getting working capital or financing?

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