In the lean, early years of running a business – that crucial time when most startups need capital – qualifying for a loan can be difficult.
Step one is to build a solid credit rating, so a lender feels confident your company isn’t a high risk for repayment and can say “yes” to your application.
Once you’ve established a positive credit score, the perfect time to take out a business loan might, in fact, be sooner than you think. Here’s why.
Apply before you need the cash
Healthy cash flow is essential for a young business to avoid getting into financial trouble – relying too heavily on credit cards, for instance, to cover unpredictable costs and day-to-day expenses at exorbitant interest rates.
A line of credit can provide a new business with a bit of wiggle room and flexibility, allowing business owners to invest in opportunities that will bring in more revenue and nurture growth.
Likewise, having access to “rainy day” funds can help business owners take care of unforeseen yet unavoidable expenses, rather than putting them off to the company’s detriment.
Waiting too long can be risky
When a business desperately needs cash to stay afloat, the best time to ask for a loan was probably six months ago. A company in trouble isn’t going to convince a bank to approve a loan, which is why it’s wise to speak to a lender well in advance of when you think you’ll need additional funds.
Naturally when a business is performing well, a loan or line of credit may not be on your radar – but when the books are looking their best is actually the perfect time to ask. As a rule of thumb it’s wise to apply for twice as much as you project your business actually needs.
It’s always better to have access to more funds than you need as a cushion than to have too little – or risk not qualifying when you apply for additional funds later.
Borrow funds early to fuel growth
When a business is ready to expand, the need for cash can be the only thing holding it back. Whether your plans include buying another business, opening another location, or scaling to serve more customers, talking to the bank earlier rather than later can help you overcome any financial obstacles in the way of meeting your future business goals.
Always think ahead
Small business owners can get into trouble when they try to manage long-term costs with short-term financing solutions, such as lines of credit – which can eventually lead to cash flow problems.
Keep your financial records up to date, so you’re able to spot the need for longer-term financing early – if, for instance, you’ll need to invest in new equipment or hire new staff to meet next year’s production targets.
Applying well in advance can help preserve your savings and short-term financing reserves.
The bottom line
So what’s the simple answer to the question “When is the right time to borrow for the business?”
For most companies, as soon as a lender will approve financing.
Talk to your bank about your desire to proactively invest in your company’s growth and sustainability, so you don’t miss any opportunities to secure the funds you need to achieve your dreams.
Get in touch with us to find out how we can help you.