"Financing is the lifeblood of small business."

How often have you heard or read that phrase? I'm betting the number is high enough that your eyes glazed over as soon as you started this article.

Un-glaze them. Learning and relearning the fundamentals of running a successful small business is like taking your daily vitamins. Chief among those fundamentals is the mystery of how to procure the money your business requires to continue being a business.

You can start unraveling the mystery by asking yourself the following questions:

1. What is my best financing vehicle?

I started my first business 20 years ago. Back then, financing options were pretty limited. You went the traditional bank route or opted for credit cards or borrowed money from your rich grandma; that was about it.

Thankfully, that's no longer the case. Today's small business owners can hop on the internet and find hundreds of financing options with just a few keystrokes. A wider range of choices, however, calls for patience and discretion as you narrow them down to what's exactly right for you.

When do you expect to pay the loan back? How often do you want to make payments? Do you want a fixed or variable interest rate? In short, what lending vehicle and time frame are you comfortable with, where you'll have high confidence that you're going to pay the sucker off?  

2. How much money do I actually require?

There are two basic pitfalls to avoid here. The first is that you overestimate how much financing you need to purchase equipment, cover payroll, promote your product, etc.; the second is that you do the opposite and underestimate.

If you overestimate, it means you pay interest on money you're not going to end up needing or using. If you underestimate, you can screw up everything you're working on and put your entire business at risk.

Be disciplined about figuring out the exact cost of whatever you're working on to take your business to the next level. It can be tempting to just grab what's handed to you; don't give in. Invest the time, crunch the numbers, and approach potential lenders with the confidence that comes of knowing you'll neither overshoot the mark nor sell yourself short.

3. What if whatever I'm borrowing money for doesn't pan out?

If your entrepreneurial temperament is anything like mine, you're optimistic to a fault. I tend to believe that whatever project I'm borrowing for is going to take off like a rocket.

On the one hand, this kind of chutzpah can be helpful. It fuels an energy and creativity that a more timid approach can't hope to approximate. On the other hand, nothing will bring you down to earth faster than a financial disaster.

Don't borrow money naively. Ask yourself, "If X fails, what will be my next move and how will I recover from it? Can I recover from it?" This can be an uncomfortable process, but it might end up saving you a lot of grief down the road. I guarantee that it'll build discipline.

4. How much work am I willing to do to get the loan?

The answer to this question will have a huge impact on how many lenders you talk to and who you talk to. You're busy enough as it is just running your business; applying for financing requires extra work.

It's also an accurate gauge of your commitment to the thing you're trying to build. You can't build it without money; if you're unwilling sacrifice blood, sweat and tears in pursuit of the latter, what does that say about your mindset overall?

Finding a tailor-made loan for your business isn't easy, and it shouldn't be. It does get easier with experience, and seeing your extra work pay off for your business will provide no end of motivation. To get to that place, you'll have to grind. Decide for yourself whether it's worth it.

5. Am I qualified for financing?

Answering this question means answering others: Are you familiar with your personal and business credit scores? Are they solid, weak, or something in between? Do you have a firm grasp of your cash flow, your income-to-debt ratios, your tax returns?

If your answer is no, the first four questions in this article are moot. Obtaining great financing requires putting your financial house in excellent order. If this seems overwhelming, take comfort in the fact that tens of thousands of entrepreneurs have been in your shoes.

I'm no exception. I was a complete naif when I began. My personal and business credit was nonexistent; lenders wouldn't touch me with a 10 foot pole. A scarcity of educational materials meant that I often had to learn the hard way, through sheer trial and error.

If the internet has led to a proliferation of lenders and lending vehicles, it's done the same regarding information about how to access them, along with new technologies to help you do it in the right way. Take advantage of these resources today, because you never know what tomorrow will bring.

Published on: Apr 5, 2019