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Borrowing for Your Business

Peter Drucker, the famous writer and management consultant, said that business all boils down to two things: innovation and marketing.  Innovation does not mean you have to create a new widget that nobody has ever seen.  Innovation can mean – and for most successful businesses normally means – adding value to an existing product or service.  Marketing is obvious.  If you have the coolest widget but nobody knows about it then your business with the cool widgets won’t be around very long.  So let’s not turn this into rocket science.  According to Drucker, business is quite simple.  So does that mean he’s saying it’s easy?  Absolutely not!  Think about your business being all about innovation and marketing and you’ll not only make Uncle Pete happy but you’ll simplify your business and make it easier to make decisions about goals, direction, and daily practices.

If you ask most business owners today if they need some cash to start, build, or grow their businesses and the vast majority of them are going to give you a quick “Heck yeah” answer along with a look that says “what kind of question is that buddy!”  So before we talk about all the free flowing money that’s being handed out (if you believe that I might have some over-priced real estate to sell you in some areas where the economy is bad) this is where you may not want to hear what this author has to say.  Why?  Because it may not be what you want to hear.  I have seen thousands of people looking for money for their businesses and I’ve seen that most business owners do not borrow money for the RIGHT reason and the RIGHT way.  Obtaining business financing is like anything else, it can be done the right way or the wrong way.

The Right Reasons to Borrow for your Business:

Am I going to use the funds borrowed for the right reasons and initiatives?  What does this mean?  Again, it’s probably simpler than you think.  Are you using the borrowed funds for innovation or marketing purposes?  Anything else puts you on a slippery slope.  So let’s talk about these two purposes.  There are some companies who have done such a good job with marketing or they’ve developed some great methods of distribution and the products are flying off the shelves.  I realize this is rare but it does happen.  If that’s you and you know there are areas of innovation or added value that need to improve then you can probably justify the financing to improve on your product, service, and the value-adds that keep clients and enhance their experience.  I would stress to businesses who borrow money for innovative purposes to be careful if the cash-flow of the business is not solid because your new loan or line of credit brings with it the debt service payments that needs to be covered each month.  This leads to the reason why most people should be obtaining financing.  We like to call it RGA or Revenue Generating Activities.  If you use your funding for the right RGA and you execute your plan then you’re heading down the right path.  We’re only scratching the surface here but this takes us to the next important factor of how to obtain or access your business financing.

The Right Way to Borrow for your Business:

Keep in mind that we are only focusing on borrowing money or creating debt.  We are not looking at equity solutions like venture capital, angel investors, private equity, etc.  Equity means giving up ownership in your business and is almost always more expensive than forms of debt like loans and lines of credit.

There are 6 goals you should try to accomplish when borrowing money for your business:

1.  Accessing capital – the “bottom line” here is that you want to be successful in getting some or all of the funding you need for your business.

2.  Separate and preserve your personal and business credit – when you borrow money the right way you’ll keep those loans and lines of credit off your personal credit.  By doing this you will preserve your good personal credit if you have good credit.

3.  Achieve or maintain excellent personal credit – With the right plan you’ll be able to maintain your excellent personal credit by keeping loans and lines of credit under your business and keeping them off your personal credit report.  Please note that you’ll likely be signing a PG or personal guarantee as the owner of the business but those loans and lines of credit – if they are properly originated by the right lender – should not show up on your personal credit unless you got behind on the payments.  So don’t miss payments.

4.  Cash flow friendly – Look for the lending solution that has the most reasonable monthly payment since the monthly payment will impact your cash-flow.  When you access capital for your business, you will most likely NEED to generate cash-flow (such as RGA mentioned earlier) but your ultimate goal is to generate and increase your profits.  Remember that cash-flow will keep the doors open for business but profits will generate a better life for you, your family, and your business.

5.  Minimize interest expenses – You want to keep the interest costs as low as possible.  I personally think that the cash-flow component and the separation of business and personal credit are more important than this but there are exceptions to every rule.  Bottom line here is that when you know your credit and lending options then you will be empowered and confident in making decisive actions on what is best for your business.  The by-product will be getting the best loan or line of credit for your situation.

6.  Maximize tax benefits – I always ask people this question, “do you think that savvy, wealthy business people are missing out on tax benefits?”  Probably not too many.  I agree.  So why should you?  The common use of personal credit cards and personal loans get in the way here.  They may not make it impossible to get a tax benefit from them but it’s much cleaner and easier if you have the right business loan product.

Tom GazawayFounder and President, Hawkeye Management
Tom is President of Hawkeye Management, a firm that specializes in unsecured business credit lines for small business owners. Through their pre-qualification process and detailed analytics, they match small business owners with lenders who will issue business credit without collateral. | Facebook | @TomGazaway | More from Tom

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Discussion (8) Comment

  1. Jordan DobbsVisitor

    I know this isn’t going to seem like a real business, but I know women who are making it a real business every day and being offered 8-10 cars, and only working this one job, and some of them even putting their kids through school without the help of anyone because their husbands have been able to quit their jobs! I just started my own Mary Kay business. My only problem is I need inventory to throw parties and have gifts and samples to give out to people for incentives for them to do parties and events. But I need at least $1800.00. The goal for what I really needed was 3600.00 but the minimum I am looking to get is $1800.00. I have tried credit cards and loans but I messed up my credit a long time ago when I was younger and it hasn’t been fixed yet. I am working on it though. I just need something to jumpstart my business and then I will be ready to go. I just need to know who would help someone with bad credit/not enough credit for this small amount so I can achieve success like all the women ahead of me! Please help! I need some suggestions. It may not be a real business to some people, but if you know anyone who does it for a living then you know, this business can change your life. I am just running out of options on how to get some inventory.

  2. refiVisitor

    Sales training is a great way to achieve more sales. But you have to first of all focus on what is lacking in your staff when it comes to their existing performance and then choose or design a sales training course for their benefit. This applies as to what ever industry or products that they make be selling

  3. dennisVisitor

    Tom, really it has been a very hard time for small business. Here is a story for you 2008 i had my 20 year line pulled. The bank pulled it at 680,000.00 3 years ago. I have had to run the business on my own money and pay down my debt. Which i have in 3 years taken my pulled line of 680.000.00 to now 118.000.00 and ran my company on the money we generate. this includes paying medical dental 401 and all the other bills we all know about.

    The truth is my line should have been pulled and many of us think i just need A line which is true but how many of us really have the financials to deserve a line. so from your experience here is my question. I have been profitable for two years small but profitable as i pay down the debit and keep company running of course my profits would be in the 10 to 15 percent if i was not paying down the line. I have been so locked up in my mind i have not even tried to get help as i do not believe there is help. Any thoughts?

  4. This is the best, most well thought out explanation of how and when to use debt that I have read. I appreciate your contribution to small businesses as they often take on debt at the wrong time and for the wrong reasons. I have seen debt crush otherwise good businesses and its a sad story.

    If you dont mind, I’d like to ad that business owners should assemble a team to help them through the debt process. A loan originator, such as yourself, who understands business and how to use debt is important. Equally important is having a financial management expert who understands operations. Ordinary CPA’s will not do here becaue they don’t have the operational perspective it takes. A good CFO type person will help you put together a loan package that is more likely to be accepted and be accepted with better terms.

  5. Paul SteakumVisitor

    How many licks to the center of a tootsie roll ? , only kidding.
    Seriously, though, I am looking for money for a start up business and I am having no luck with banks and SBA seems daunting. Are there any other avenues for capital, I only need 50K or so, I have excellent credit and zero debt, yet banks are not interested. Any thoughts ?

    • Tom GazawayVisitor

      Companies like ours and the ones mentioned in the previous comment response help small business owners like you so feel free to reach out to any of us and we surely can provide some solutions. There’s a whole army of small business credit and lending solution providers out there and the majority of our clients know they can’t get bank funding or they come to us after the bank said no.

      Thanks for your comments.

  6. David VesselsVisitor

    Where else do you look for loans banks are not lending

    • Tom GazawayVisitor

      Hi David, if you work with a small business loan broker they usually have a variety of bank and non-bank lenders. Their soloutions can range from low-cost to high cost so you’ll want to work with someone you can trust. A couple good resources for this would be Commercial Capital Training Group in Albany, NY or Compound Profit in McKinney, TX.


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