The Absolutely Best Time to Borrow Money
BY Ami Kassar
Consider taking out a business loan when you least expect you'll need it. Here's what I mean.
At my loan brokerage firm, I receive calls from small business owners everyday who are desperate for loans--not only to save their businesses, but just to keep the roofs over their heads. If they had called me a few months earlier, when the financial needs were just emerging, securing a loan or line of credit would have been much easier.
It's common sense, but many small business owners ignore the fact that it's easier to get a loan when you don't need one than when the situation is dire.
The High-Interest Treadmill to Avoid
Imagine a scenario in which it's the middle of the summer and your air conditioner blows up on you. It's going to cost $25,000 to replace it and you need to do it quickly. There is not much time to think, or your business is at risk. If you have a line of credit in place for an emergency like this, you can write a check and pay a low interest rate of 5 percent to 6 percent until you figure out a longer-term plan. If you don't make that contingency plan, and you don't have the cash on hand, you could be forced to call a quick short-term lender who will charge 60 percent to 80 percent interest. This is what you don't want to do.
Small business owners tend to have short-term memories and wind up concentrating on present victories and defeats. If things are going well, you probably think that they'll continue that way. But if the recession made anything clear, it's that the world can change quickly and unexpectedly. No one is immune.
Just as people take out life insurance plans to help take care of their affairs in case of unforeseen death, so should owners have lifelines for their businesses. The most successful entrepreneurs anticipate potential problems down the road and plan accordingly before hitting them.
You Know You're in a Good Position to Borrow When...
If your business is doing well, now is the right time to evaluate your contingency plan options. When cash flow is steady and building, banks will line up to give you money at the best rate possible. A line of credit can be a lifesaver in case of an unforeseen emergency or during a slow season. While there might be some small expenses to get a line of credit set up, once you have it, you only pay for it if you use it.
If you have accounts receivable, your industry is showing growth, and you have good credit, you're in a good position to take a loan or a high line of credit at a good rate. With a business that is turning profits, you can be confident that you'll also be able to pay back the loan, which is something that helps all small business owners and entrepreneurs sleep better at night.
You Know You're in the Worst Position to Borrow When...
On the flip side, if you wait until you aren't able to make your payroll or aren't able to pay your lease, it will be more difficult to get any sort of loan because banks and alternative lenders are hesitant to lend money to a business that is at risk of shutting down or going bankrupt.
When you get desperate, your choices dwindle and you may be stuck with a high interest loan with short amortization period that will leave you right back where you started after a few months. This is when businesses can get sucked into the trap of short-term loan renewals that they have trouble getting out of and rates that they struggle to pay.
For many businesses, a call for a lifesaver loan is completely avoidable if a loan or line of credit is taken a little earlier in the game.
Are you prepared to weather potential storms looming on the horizon? Do you have a small business contingency plan? Let me know in the comments below.
AMI KASSAR is founder and chief executive of MultiFunding, which helps small-business owners find the best business-loan options. Kassar speaks regularly at universities and small-business events about entrepreneurship and access to capital. He has an M.B.A. from the University of Southern California and a B.A. in American studies from Brandeis University. He lives in the Philadelphia suburbs with his wife and two children. @akassar