Getting a loan from a bank always sounds appealing. Your company is growing, new hires are coming on board and it is getting increasingly difficult to pay bills, payroll and taxes. Most business owners instinctively think to call on a bank to lend them money to deal with this cash crunch.
Here are some strategy suggestions to consider while figuring out your best financing options:
- Once you secure a loan from a bank, you are done. The bank uses “All Business Assets” as collateral for the loan, so going back for more capital means applying for a bigger loan. Your financial statements and tax returns will have to support the increase.
- To get a bigger loan, your options are: Pay off the original loan to release the collateral, or get the bank to take a subordinate position on your loan collateral, allowing a new lender to lend in first position and the bank moves into second.
- The bank will take a conservative position on your credit availability. They cannot consider the story, or the horizon, or pro formas and ideas. They have seen firsthand what lending like that will do to their balance sheet.
If your company does opt to get a line of credit from a bank, consider this:
- Have discipline.
- Use discipline
- In practice, only take money out of the line that you are ready to replace as income comes in.
Because otherwise, the epitaph on your company tombstone will be:
“They chiseled away at their line of credit until it
was all used up and then… they had no options”
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