Building a business costs money—usually more than you can generate from your operating revenues alone. Securing the funds you need will require careful planning and preparation.
Whether you’re a fully operational business looking to add a new truck to your fleet or build a new location, or if you're just starting out, you’ll need money to turn your plans into reality. It might help to work with an accountant to calculate estimated costs for reaching the next level of development.
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The Basics
Before you borrow, list your basic business expenses. Each time you expand your business, these costs are likely to increase:
- Employee salaries
- Rent
- Electricity, heating, air conditioning, and fuel
- Paper and other office supplies
- Purchasing or leasing operating equipment
- Decorating or remodeling costs
- Legal and professional fees
- Insurance
- Taxes
- Machinery and power tools
Give Yourself Some Credit
One option to increase your funds is to get a line of credit, which is a type of loan that gives you short-term or seasonal funds.
Basically, a line of credit is very similar to a credit card, with the notable exception that interest on a line of credit is lower and may be tax-deductible. You borrow cash, either unsecured or using your business assets as collateral, and pay back the principal and interest on any outstanding balance each month.
A long-term credit loan usually lasts up to five years and is helpful if you want to have money for operating costs until your business turns a profit. Lenders typically require that you provide collateral or sign a promissory note on this type of loan and pay it back in installments. Of course, you should always be wary of getting into unnecessary debt or borrowing more than you can afford to pay back.
Do You Qualify?
If you’re thinking about taking a loan to build your business, there are several qualifications that banks and investors normally expect from you, as the owner, and your business. Before you apply for a loan, make sure that you can provide potential lenders with the following:
- Personal income tax returns for the previous 3 years from principals of the business
- personal financial statements from principals of the business
- business income tax returns for the previous 3 years
- business financial statements (Profit & Loss and Balance Sheet) for the previous 3 years
- Year to Date business financial statement*
*Requested only if three months or more have elapsed since the latest fiscal year-end statement was prepared.
Getting the Loan
Working with a financial institution that has a history of offering loans to growing businesses can be easier to work with since they’re more familiar with your needs.
It’s a good business practice to have a strong relationship with a specific institution, as that could make it easier for you to get loans when you need them. If you don’t use one particular bank or credit union, you might want to open a business banking account or secure small lines of credit before applying for a big loan.
All potential lenders will probably ask how much you are investing personally in your business venture. Among other things, it’s a way to assess your commitment to the business.
