Dear M & M: I am thinking about getting a loan for my business. Any thoughts or things I need to consider? – Julie
Dear Julie: Adding debt to any business is something one needs to think about carefully. Here are four things to consider. The first consideration should be, why am I borrowing? Is it to pay off old debt, buy new equipment, purchase more inventory, remodel or to expand current business. At the end of the day will the loan make your business more profitable? It might be nice to have a new delivery truck, but do you really need it now? Maybe you could have a sale and get rid of older inventory to generate the cash to buy that new line or add to current inventory. The second consideration is always exactly how much do I need. Let’s call it use of funds. Make a list, cost it out, shop around. Make sure you have included everything from, delivery to setting it up. Does this expansion require you to hire more workers? Do you have the working capital to get it running? Sometimes you might not need to borrow as much as you thought you needed. On the other hand you never want to start something you cannot finish and run out of cash in the middle of the expansion. The next thing one needs to consider is can I pay the money I am asking for back? Do you currently generate enough cash to pay back the loan? How much more in sales do you need to do to service this new debt? What is your plan B? What are you going to do if the new sales you forecast don’t happen? Finally, the fourth thing to consider. Are your financials in order? Are your taxes paid, balance sheet current, profit and loss statements accurate and are cash reserves sufficient? I will leave you with one thought; before borrowing money from a friend it’s best to decide which you need most. Joe Moore Read more by clicking here.