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When Is the Best Time to Borrow Money for Your Small Business?
April 25, 2022
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Small business owners face many challenges when they apply for loans, but sometimes, the biggest challenge is their own making. If you wait until you urgently need financing to start looking for a lender, you’ve waited too long. It’s often said that the best time to borrow money is before you need it, and there’s a grain of truth to that. The best time to borrow is when you have a strategic plan for the money and aren’t in critical need. Taking a thoughtful approach to seeking financing can make the loan process less stressful, enhance your chances of success, and ensure that you can pay back the loan with ease.  

Plan for future financing needs

While it’s difficult to foresee every possible financing need over the next 12 or 24 months, taking a proactive approach to business planning generally can give you a fairly clear idea of what you may require. For example, do you expect to buy new equipment, add staff to meet demand, pivot operations, or expand your business? All of these plans might be easier to accomplish with borrowed capital. Once you know what purpose the loan will serve, you can consider how much money you need and what kinds of loan terms will best suit you.

Planning in advance gives you time to thoroughly investigate your options so you can find the best solution for your situation. The average small business owner spends about 33 hours seeking a business loan, often over several weeks or months. The lender landscape has changed greatly over the last several years, making it more important than ever to do your research before applying for a loan. With alternatives to traditional bank loans now including online business loans, crowdfunding, invoicing financing, and microlending, borrowers need to learn about available options and evaluate which might be the best fit for their businesses and current needs.

Is your business ready for financing?

In today’s economy, lenders are becoming more cautious and putting more weight on a business owner’s cash flow, time in business, and credit history. Advance planning gives you time to honestly assess your financial circumstances to determine if your business is likely to qualify for the loan you seek.

Are your business and personal credit profiles in good shape, up to date, and accurate? If not, what steps do you need to take to improve them or correct mistakes? Does your business have sufficient cash flow to make the required loan payments? Many lenders will want direct access to your business bank accounts as proof that you can handle the payments.

Your current financial situation will directly impact the financing options you can access. Evaluating your situation realistically can help you zero in on the lenders who are most likely to approve your loan application.

After evaluating your business, if it doesn’t make sense to borrow, a strategic approach allows you to modify plans, postpone big initiatives or forego expansion in the short term in order to position your business for greater success a little further in the future.

What happens when you need money fast?

Sometimes disaster strikes without warning, and your business needs an infusion of funds to keep operating or get back on its feet. Ideally, you’ve planned for this possibility, too, by insuring your business against cybercrime, natural disasters, and business interruption. Building an emergency fund will also help ensure catastrophes don’t take you by surprise.

If you haven’t taken these steps, however, you’ll be at a disadvantage when it comes to borrowing. Even in hard times, lenders’ key concern is your ability to make your loan payments. They want to see evidence that you have sufficient cash flow to repay the loan, plus a well-thought-out plan for using the loan proceeds. Will the money ultimately improve your business, or just keep it on life support until the inevitable happens?

Disasters can make financing harder to come by; in a crisis, when many business owners need money, getting a loan from your bank may take too long. If you can’t wait, online lending sites that match lenders with borrowers may be able to help you find the money you need. Just be sure you fully understand the loan terms and run the numbers to be sure that even in a worst-case sales scenario, you can manage the payments.

“If I had that, I wouldn’t need a loan.”

The most successful business owners look at financing in the same way they look at other business tools. Financing should never be used to metaphorically “roll the dice,” but rather as a way to make strategic investments that facilitate growth and increase business value.

Assessing your financing needs the same way you would evaluate other resource needs helps you avoid making bad decisions in a crisis. Instead of relying on borrowed capital to simply survive, you can use it strategically to fuel growth and build a healthy business.

In reality, if your business “needs” the loan to survive, there are larger issues that should be addressed in a regular strategic planning session. Gambling with a business loan could likely result in kicking the can down the road a little further and creating a bigger crisis in the future.

Learn how OnDeck can help your small business.

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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.

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