Decide if borrowing is right for you
If you decide to approach banks or finance companies for money, make sure you can make a good case for the loan and you can pay it back on time.
Many small business owners have borrowed money at one time. In general, a loan can be a good option if you:
- will use the money to grow or cover a short-term cash shortfall, rather than as a bailout
- can make repayments on time, every time
- can pay it off early, but only if this will save you money – for example, compare reduced interest and early repayment fee
- understand the loan’s terms and conditions.
Questions to ask yourself
Why do I need the money?
The purchases you make should give you a good return, for example, an asset essential for growth.
How can I cut costs?
If you can trim your spending, you might not need to borrow as much money as you think.
Can I afford the repayments, even during slow months and at tax time?
Be confident you can pay on time, every time. Banks and other lenders usually charge extra for late or missed payments. Prepare a cash flow forecast and, if you’ve been in business for long enough, review your financial records for the past two years.
How much interest will I pay?
If you can afford it, opt for a shorter term or higher repayments to keep interest charges down. Use an online tool to model repayments for different terms and interest rates – try the debt calculator on the Sorted website. Then factor loan repayments into your cash flow forecast, and decide if it’s worth taking on debt.
What loans am I eligible for?
Borrowing options are very different for new businesses and existing businesses. An accountant or bookkeeper can help you decide if a loan is a good idea or not.
Pitching for a loan
Securing a loan involves more than just walking into a bank and asking.
To get the best deal, shop around and be prepared. Do your research into loan types, different lenders and your own financial position.
Just like investors, banks will want to see that your business is viable. They will ask you to prove you can pay back the loan and the interest.
When you approach a bank for a business loan, be sure to bring your:
- financial records – for example, your profit and loss statements
- cash flow forecast
- business plan.
If you’re new to business and don’t have financial data to back up your application, lending options are more limited. You might have to take out a personal loan or borrow more on your mortgage.
Have a good relationship with your bank
Banks are more likely to offer better deals and lower interest rates to people they know and trust. Establishing a good relationship with your bank pays off.
Even if you don’t currently need to borrow money, start building a good rapport with someone at your bank now. This might be the branch manager or a specialist advisor.
Many banks offer extra support for those running a business – for example tailored banking services and ways to connect to potential investors.
Common mistakes
Avoid these common mistakes:
- Borrowing money without forecasting your income, or a forecast which over-estimates your future earnings – it’s better to understate earnings and overstate costs.
- Not understanding the terms and conditions of your loan, or the interest rate you’ve agreed to pay.
- Getting a loan and spending up large – it might feel like easy money, but have a plan for what to spend it on.
- Not having a plan in place to pay back your loan – it’s important to budget for regular repayments.
Learn more about