There comes a time in the life cycle of many businesses when the next best step is to borrow capital to expand or otherwise add value to the business. Commercial borrowing has a lot of pros and more than a few cons (dangers for small business owners to avoid).

Choose the Right Borrowing Option for the Business

Small businesses that have demonstrated a history of growth have several options for business borrowing to take the company to the next level.

Equity capital is raised when an outside investor purchases a portion of company ownership. It’s a way for growing businesses to obtain additional capital without taking on additional debt. However, finding an investor – the right investor to suit company needs – may be difficult and time consuming. In addition, the investor may want more control of the company’s day-to-day operations than the owner wants to share.

Debt financing is a common means used by small business owners to add value to a growing business. Debt financing is simply borrowing the required capital and paying it back, with interest, usually from improved business earnings. Here are some common types of debt financing:

A commercial line of credit could be a good choice and is popular among small companies. The line of credit can be collateralized with personal assets (a home, for example). You can start with a low credit limit and gradually increase it over time, you can easily access funds, and you only pay interest on what you’ve borrowed.

A term loan is a straight business loan that’s an option to consider for a variety of business activities. You can obtain either a collateralized or an unsecured loan. One advantage of a term loan is a regular schedule of fixed payments, making budgeting a little easier.

Small Business Administration (SBA) loans are a good alternative for many small companies. The SBA guarantees the loan, making your business a more attractive borrower for traditional lenders like banks, and rates are usually reasonable.

Commercial credit cards offer another borrowing resource to small business owners. These credit cards, usually available through your bank, are great tools for tracking business spending and controlling expenses. They’re also useful at tax time in identifying deductions. Many offer incentives like reward points or cash back, and you can control employee access by limiting who gets a company credit card.

Start by choosing the right type of financing. If it’s a short-term need, a credit line may get you through. If you’re investing in manufacturing equipment, a collateralized business loan or a loan backed by the SBA may be your best choice.

The right loan type helps your business move to profitability. The wrong type of loan can limit growth options in the future.

Questions to Ask a Potential Lender

When you meet with a lender, come prepared with a list of questions:

·         What interest rates are available?

·         What collateral is required?

·         When are payments due?

·         Is there a big balloon payment?

Develop a list of questions related to your business and revenue model. Each business has different capital needs at different times. Make sure your lender understands what you need by asking questions associated with your business, which will differ from the business across the street.

What to Watch Out for

Borrowing capital may have a significant impact on your company’s ability to grow at the pace you’d like, so it’s important to consider both the pros and the cons before signing for a loan.

One danger to consider is putting up too much to secure financing. If you put up your office condo as collateral, you may get the loan, but if the intended plan doesn’t fly, you could have a serious problem on your hands.

The most important question to ask – and answer – is how the loan will be repaid. Can the loan be serviced with current income? What impact will monthly payments have on cash flow? The last thing you want to do is take on a debt load that you can’t pay back.

Do a complete cost analysis before borrowing commercial capital. If you don’t know how, hire an accountant to crunch the numbers so you aren’t flying blind the day you open for business.

Get the guidance you need from your bank. These financial and business professionals help small businesses find the financing that’s right for their situation. Talk to your banker today and get down to business.


The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice.