Small business borrowing is at the highest it's been in six years, according to the Thomson Reuters/PayNet Small Business Lending Index. This suggests "[t]here is some optimism returning to small businesses," which "are responding to some demand," PayNet's president tells Reuters.
The index, which measures the volume of financing to small companies, rose 11 percent in July. The level has not been this high since August 2007.
With that said, here are some general tips to consider for small business owners who are looking for financing:
First, make sure you need to borrow money. Financing is a big decision. Before you take the plunge, be certain that you really need it. Ask yourself questions like: Will you be able to manage existing cash flow more effectively? What are your exact needs? Is this a low point in your business cycle? It's always better to be sure.
Pay attention to your credit score. Lenders will look very closely at both your personal and business credit scores. Your business credit is one of your most prized assets and will be a huge indicator to lending institutions in determining whether you are able to make payments on time, be responsible, and how much of a liability you are.
Loans v. equity. In making the decision to finance your small business, one of the big questions to ask at the beginning is whether you should even take out a loan. Would it be better to sell a slice of your business instead? There are different considerations to keep in mind for each, and it often depends on what stage your business is at. Businesses in the formation stage are more likely to sell an equity stake, while loans make more sense if your business is already established and has ongoing financing needs.
Create a business plan. A good business plan is essential in your preparations for impressing a prospective lender. It shows that you've thought out your goals, have the essential elements (like financial projections, cash flow, etc.) down on paper, and that you are fully prepared to assume the responsibility of dealing with a lender.
If you're ready and sure that a business loan is in your near future, check out FindLaw's Business Loan Resources for more information.
(Disclosure: FindLaw.com is owned by Thomson Reuters.)