Many banks and lending institutions offer small businesses a suite of loans and other types of financing. Before taking on debt, think about the impact on your business — positive and negative.
If you decide to approach banks for money, make sure you can make a good case for it and you can pay it back on time, every time.
Many small business owners have borrowed money at one time or another, but that doesn’t mean it’s always the right decision.
Generally speaking, taking out a loan is reasonable if you:
When it comes to capital, Vicki Ha, owner of Wellington’s House of Dumplings, believes in only spending what she has. “I still haven’t borrowed one cent from the bank and there’s not a lot of businesses like that,” she says. Ha thinks bank loans aren’t a safe business practice because she can’t prove how much income she’ll make.
“My approach is that you can’t predict sales,” she says. “That’s the problem with a lot of businesses. They go to the bank to borrow $40–50k based on their own predictions. But who decides that? It’s not the owner — it’s the customers.”
Ha avoids borrowing by only buying what she can afford and avoiding frivolous or spur-of-the-moment business purchases.
“When I started, I had $20,000 in my bank but I would only spend it very wisely. I’m still very cautious about spending money.”
While Ha consciously decides not to take on debt, loans can be a viable option for those who carefully assess whether borrowed money can be paid back on time and put to good use.
When you're deciding whether to borrow money or not, consider these questions:
An accountant or bookkeeper can help you decide if a loan is a good idea or not.
These loans could be easier to get, but tend to come with higher interest rates.
Securing a loan involves more than just walking into a bank and asking.
In order 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. You’ll need 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:
If you’re new to business and don’t have 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.
This means using your own money and not taking on any debts. But it’s not suitable for all businesses — see Choosing the right types of funding for more on bootstrapping.
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 manager 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.
A number of banks offer extra support for those running a business, eg tailored banking services and ways to connect to potential investors.