Entrepreneurs in all industries should ask themselves these four vital questions before seeking funding for their businesses. The answers can provide some valuable insight into the core premise of your business, and if you actually need capital at all.
1. Can you clearly articulate how the loan will help your business?
If you can’t stand in front of a mirror and tell yourself precisely why you need the money and what you would do with it, you should stop and think about whether a loan is really right for your business.
A lot of times, entrepreneurs know they need money to get a business up and running or out of a hole, but can’t explain in plain terms what they would do with the money if they got it. Without a clear plan for fund allocation and a way of paying the loan back, you’re heading into dangerous waters. There might not be another life raft for you to climb aboard next time you really need cash.
2. Are your books up to date?
All small-business owners should have a keen understanding of their company's financials and what's really going on under the hood. At any given moment, you should be able to print out an accounting report that's less than two weeks old and intelligently talk about what’s going on with your business. If you can’t do this, you’re likely not ready to borrow money, because you don’t have a clear picture of what you have.
3. Do you understand your profit and loss and balance sheets?
The truth is, most entrepreneurs are so busy practicing their trades that important things like balance sheets often get forgotten. Don’t lose sight of profits and losses. Not having a clear picture of your business is like running a race with your shoelaces untied. One misstep and the entire race is lost.
Even if you do get financing, mismanaged accounting and a poor understanding of business financials will make your money more expensive. The borrowed money will come with higher interest rates and shorter amortization periods.
4. Are there cheaper alternatives to a loan?
A smart business owner will consider all options before seeking out a large business loan. There are often cheaper alternatives to solving potential problems than taking on monthly loan payments.
Instead of a massive loan to buy equipment or facilities, or to manufacture inventory, think about more financially responsible ways to achieve your goals. Leasing equipment and space is often a better and less expensive way to get started, and purchase-order financing can be a great way for cash-poor businesses to produce inventory quickly when there's a high demand.