You know that it takes money to make money. But, it does not exactly grow on trees. Unless you have an emergency bankroll stashed under your mattress, sometimes you will be called upon to seek financing for your small business from lenders and investors alike. But, there is a right time and a wrong time to ask for money. You need to know when to avoid small business financing, and when it will be truly beneficial to your personal and financial goals.
Do Not Ask
Probably 80% of small business investments come from family and friends. Of course, people in your innermost circle want to help you succeed both financially and professionally. For some, the money is inherited, and they decide to invest the money in starting a small business.
However, a lot of financing comes from parents and friends that have a little money set aside for a rainy day. But, if that day comes, it is definitely not a good time to ask for a small business loan. Even if you offer partial interest in the company, you cannot put the individuals you love the most in the poorhouse.
For example, if your parents have recently been sick and facing health challenges, now is not the time to hit them up for some ready cash. Doctors, hospitals, medications, and home health care providers cost a lot of money. Even if your folks are well off, now is not the time to expect them to bail you out, so your business can prosper.
The same can be said for friends. Make sure the money is there, before asking them to invest in your small business. Do not put them on the spot. No one likes to be put in the uncomfortable position of turning down your request. Never put friendships in jeopardy for the sake of your business.
Are you Able?
In a tough economy, asking for a small business loan can be devastating to your small business. Naturally, the lending institution will want to see your projected earnings for the next quarter, and possibly beyond, before any financier will agree to lend you money, regardless of your purpose for needing the money. Unless he/she can see a clear opportunity to prosper, you might as well be talking to a brick wall.
But, be careful not to make your prospects sound better than they really are at present. You need to sit down and consider your situation carefully. Even if the lending institution agrees to give you the money, are you going to be able to pay it back? Remember, the interest rates for a small business loan are quite substantial. When the payments come due, are you going to have the money to meet your additional financial obligation? If you have any doubts, now is not the time to seek a loan. Instead, you may have to cut back, use the barter system, or think of another creative way to accomplish your business goals.
Check the Market
Do not seek a small business investor or a commercial loan, until you do your homework and check the market. Why do you feel you need the money? Do you want to improve your business, or are you simply trying to keep the doors open?
How to you want to improve your business? Have you researched your customer base and discovered a product or service that you need to provide? Have you observed the competition and learned why they have more business than you? What are they doing right; and how do you need to change? Have you been listening to your faithful consumers who have expressed an interest in a product or service that you currently do not have for your clientele? Basically, have you done your homework and learned how to improve customer satisfaction?
Sadly, not all businesses are destined to grow and prosper. For example, are your expenditures exceeding your profits? Can you see a light at the end of the tunnel, or will you be throwing good money after bad? In all honesty, you need to know the market and determine if customers really want what you have to offer, and this is just a temporary slump.
On the other hand, if you provide a high end service or product, and a bad economy has reduced your clientele to saving their money for the basic necessities of life, you may have to think about changing your store to reflect the times. Unfortunately, if this is not possible, a loan will only put you further in the red. You may have to consider cutting your losses.
In short, avoid small business financing, if the market is not likely to change and your level of debt is going to increase and only prolong the inevitable. Do not seek a loan from friends or family, if the money is simply not there, and you will put your relationship in jeopardy. Also, do not seek a commercial loan, unless you are fully aware of the terms and are certain you can make the payments. Otherwise, you could end up losing more than your business. But, if you test the market and know your potential customer base, fully understand the necessary expenses you will incur as a small business owner, and do not overextend yourself, you can be one of the 50% of entrepreneurs that become successful businesspeople.