While some businesses may go through their entire lives without ever needing or wanting to borrow money, unfortunately most will go through a time when current cash flow doesn't allow for growth without an infusion of capital. Today I introduce you to the "Optimum Borrower".
All of us knows at least one. That one small business owner that seems to always nail it. He is never left wanting for cash and he always seems to have the marketing budget or the right equipment to get the job done. He is an Optimum Borrower. You can become an Optimum Borrower as well, but you can't do it without preparation, focus, and courage under fire.
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These are the times that your decision-making is paramount in your entrepreneurial endeavor. Make a good decision and you will take your business to new heights and never look back. Make a bad decision and you could find yourself needing another loan to bring yourself back from your prior mistake, or even worse be so under-capitalized that you cannot come back. To be sure, there is no one way to go about making this decision. There are, however, several factors that can be analyzed individually and collectively to increase your odds of success when borrowing capital. The Optimum Borrower knows these factors and knows how to mesh them together to make optimum decisions.
As a qualifier, I will limit my information to only include small businesses, and only include businesses that are over 2 years old. Venture capital, angel investing, and start-up loans are a completely different animal, and may be addressed in future entries. We know that as a small business owner, you want to become an Optimum Borrower so let's get started.
Factor #1: What is the purpose of the money?
This seems obvious, but the purpose of the money is the most important factor in the borrowing decision. Do I need a marketing plan? A new piece of equipment? Why do I need this money and will it be used to grow my business or simply to sustain it through a rough time? Really think about the reasons why you need a loan. Then, and only then, are you ready to decide which type of loan you will need. Make it a real process, set yourself a deadline, and set aside time to think only about your capital needs and what you can do with money you borrow. You may find that you don't need to borrow at all. Find another way to earn the money and not borrow it, and you have become an Optimum Borrower by proxy!
Factor # 2: How much should I borrow?
This is where many people make debilitating, and sometimes fatal mistakes in judgement. Just as important as the reason for the infusion of capital is the amount of capital that is optimum. Borrow too little, and any (costly) deviations from your plan for the money will make you come up short. Borrow too much, and you could wind up paying much more in interest and fees than you should have, or you could also be tempted to use this extra money in a way that doesn't benefit your business long-term. Discipline is key here (do you really need the new couch in your office when the old one is fine and you only see one client a year in there? The Optimum Borrower doesn't) and will be rewarded greatly. I advocate a good middle ground. Get what you need, get a little cushion if your plan goes awry, and feel good about your decision.
Factor # 3: What is my projected return on this loan?
It always baffles me when people skip this step in the planning stages before getting a business loan. How can you borrow money and not have at least an educated guess of both how soon and how much your return on the capital will be? Right now I am not talking about the cost of the money, I am talking about what it will do for your revenues. Can you take a $20,000 loan, sink it in to a dynamic marketing plan and have it pay off in a couple of short months? Will you be buying a large piece of equipment that will take years to pay for itself? These are the questions that can't be avoided if you want to be an Optimum Borrower. Spend the time to really nail this one.
Factor #4: What is the length of the loan?
Conspicuously, you don't see the common "what are the rates and terms?" question. Not yet. Why? Because the Optimum Borrowers know that rates and terms are mutually exclusive for the most part. Once you have a clear reason for your loan and you have determined how much you need the very next question should be "How long do I want this on the books?" For some, they can't stand the thought of having the debt hanging around for 10 years, 5 years, even one year. It just doesn't sit right with them. For others they would never dream of getting involved in a short-term business loan because it rubs them the wrong way to have to turn right around and pay it back. While individual preferences are important, they should give way to one question when it comes to terms. How long will it take me to comfortably pay this back? Here is where you have to begin to mesh your reason for the loan, the amount of the loan, and the projected return to come up with the best (Optimum) term for your new business loan.
Factor #5: How much is this money going to cost?
The Optimum Borrower never just looks at rates and makes a decision. As a matter of fact, the Optimum Borrower doesn't look at rates at all until he has completed the earlier 4 steps. Once you know why you need the money, how much you need and what your return is going to be, along with how long you want it on the books, THEN you can begin to shop for rates. Most people ask themselves the rate question way too early in the process before they have determined if there is even any value in borrowing at all! Not the Optimum Borrower. They know that not only is rate shopping boring, tedious and in most cases premature, it is rarely worth the time. A serious question: When was the last time the difference in a rate (that you actually qualified for) between one company and the next was so significant that it made you choose one over the other? If you answered that it happens all the time then you are the exception, not the rule. In most cases the money and time you spend looking for the best rates negates any pittance that you save in the.05% difference that you gain. Lenders are very much on the same page when it comes to assessing risk, and they price accordingly. Yes, you want a competitive rate, but don't forget about things like good customer service, reputation and an ability to service the debt in an effort to get a bargain. An Optimum Borrower doesn't bargain hunt. An Optimum Borrower uses the time he saves to get his capital earlier and put it to work for him right away.
When it is all said and done, you have a responsibility to yourself and your business to become an Optimum Borrower. Paying close attention to these 5 factors will have you well on your way.
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