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Op-Ed: How to Meet Last-Minute Holiday Demand: A Strategic Approach to Borrowing

There’s no question, small businesses often rely on borrowed capital to fuel growth and finance other initiatives. Money generally, and borrowed capital specifically, isn’t the answer to every business challenge, but access to capital can be an important tool for building a successful business.

As the end of the year approaches and business owners start thinking about next year, taking a strategic approach to anticipated expenses and capital needs will help you better prepare for a potential small business loan and help you determine the financing options that will best fit your business needs.

Be clear about why you’re borrowing

Understanding your loan purpose will help you make a lot of other decisions. It doesn’t matter if your loan officer asks, knowing why you’re borrowing and what you’re borrowing for will help you determine what type of financing might be a good fit. For example, borrowing to take advantage of an opportunity to purchase quick-turnaround inventory is a very different need than borrowing to expand a new retail location.  Depending upon your need, you can determine whether a short-term loan, a long-term loan, a line of credit, or other financing makes the most sense for your loan purpose.

Climbers at Everest Base Camp all know what they’re there for—to summit the highest peak in the world. They all start with a clearly defined objective. The stakes are too high to aimlessly wander around. Combined with a strategic plan, the right tools, the proper fitness, and the knowledge required to summit, their odds of success greatly increase. This is also true if you’re borrowing capital to help your business grow and thrive.

Identify exactly how much capital you really need

As you strategically look at upcoming business needs and consider your financing options, it’s important to identify how much capital you intend to borrow. Borrowing more than you really need can be too expensive and may even put the financial health of your business at risk.

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Popular culture would have us believe that access to more money is the answer to every business challenge, but that isn’t necessarily the case. What’s more, loan officers appreciate a borrower who can articulate what he or she is borrowing for and exactly how much they need.

Honestly evaluate your business credit profile and personal credit score

Lenders really want to know the answers to three questions:

  1. Can your business repay a loan? In other words, does your business have the income and the cash flow to make each and every periodic payment?
  2. Will your business repay a loan? This is a different question and the answer is demonstrated by your history and track record. Lenders look at your track record to try to determine if your business is likely to repay based upon what it has done in the past. This is reflected by your business credit profile.
  3. What will you do if something unexpected happens? Because many small businesses are borrowing to fuel growth, increase the value of their businesses, or otherwise capture additional ROI (return on investment), your lender wants to determine whether or not your business has the wherewithal to make periodic payments regardless of what happens.

Taking a strategic evaluation of what your credit profile looks like today will help you determine whether or not you’ll find success at the local bank, with the SBA, or will need to look at other options. For most small business owners, your personal credit score will always be a factor in loan decisions, so understanding the dynamic between your personal score and your business credit profile is critical as you strategically map out your need for capital.

Traditional lenders, like the bank for example, are typically looking for a credit score in the 700s (680 is usually the bottom threshold), collateral, and a track record of several years that demonstrates you are a good borrower. Fortunately, there are lenders that don’t put this much weight on these factors. If you don’t meet the criteria, it doesn’t mean you won’t find success outside the bank. Many online lenders will work with a business that doesn’t meet the stringent criteria required by many banks if they’ve been in business for at least a year and can demonstrate they have a healthy business.

Consider all your options

The first stop for many business owners seeking capital is the local bank. It makes a lot of sense. They have a relationship there. Banks and credit unions can be good options for some borrowers, but crowdfunding, non-profit micro-lenders, and online business loans can also be good options depending upon your business’ situation.

Don’t automatically dismiss something you’re not very familiar with—do some research, talk to more than one lender before you make a decision. If you find a lender you think you like, check them out with the Better Business Bureau and other review sites. You should also ask to speak with a current customer or two.

Get your documentation ducks in a row

In other words, do you have a good understanding of the financial condition of your business? It’s not uncommon for a lender to say, “If I understand more about a business by looking at the numbers than the business owner does, I’m not going to approve their loan request.”

Most small business owners don’t dive into their entrepreneurial dream because they’re really excited about the financial side of running a business. Nevertheless, it is critical to understand to build a successful business and identify the financing opportunities that make the most sense for your situation. Some lenders want to see detailed financial projections, profit & loss statements, pro-forma earning estimates, and a business plan. Others will want to see tax returns or bank statements. Having access to these reports is important, but a thorough understanding of what they’re telling you is also critical. If you’re not sure about what the reports are telling you, your accountant or CPA can explain them to you.

Thinking more strategically about small business borrowing isn’t a guarantee of a loan approval, but it will help you determine what makes the most sense for your business and help you put your best foot forward. The answers should identify areas where you are strong and others where you might need to strengthen your application. Regularly revisiting these issues will help you as your business grows and your situation changes.


Small business evangelist and veteran of over 30 years in the trenches of Main Street business, Ty Kiisel is Head of Small Business Education for leading online lender OnDeck.