If you plan on starting a business and you think you’ll need capital, I strongly suggest that you bootstrap for the first few years (or at least until you have a consistent and steady stream of customers or clients). Although borrowing money for your small business could definitely help you grow the business quicker, the first few years you’re in business will most likely be a learning experience. Success in business is not instant and growing the business will take time.
During this time period, I believe you should avoid borrowing (in case the business is unsuccessful and leaves you with the inability to pay back what you’ve borrowed). It’s wise to get a feel for the industry and learn the ins and outs of what it takes to be successful before you jump into borrowing money. Below I give you three ways to prepare yourself to borrow money for your small business (when the time is right).
- Build Your Reputation in the Industry – You’ll want to become established in your industry by building your brand and reputation. You can begin doing this by acquiring a few new customers or clients and providing them with an exceptional product or service and asking for feedback from them. I suggest asking your customers or clients for verifiable written or video testimonials that you can post on your website. When you are ready to borrow money for your small business, if you just so happen to need a business plan to be considered for a loan, you can include the testimonials in the business plan to prove to lenders that you have built a positive reputation in the industry.
- Start Generating Sales & Revenue – You’ll want to obtain a consistent and steady stream of customers or clients that help you generate sales and revenue. Again, once you are ready to approach a lender, if you can prove to them that you already have customers or clients, and sales, they may be more willing to lend to you. Having consistent sales and revenue shows lenders that you will have the ability to service the debt (so you’re less likely to default). It also shows them that you have already put your own money into the business and have taken the time to grow the business on your own dime. That lets a lender know that you believe in the business enough to invest in yourself so they may be more inclined to invest in you as well. (If you are unwilling to invest in yourself, what makes you think someone else will)?
- Build Your Personal Credit History – Building your personal credit history is critical. Lenders will most likely check your personal credit history, even though you are applying for money for your business. It is very unlikely that you’ll be able to get any small business loans without a lender checking your personal credit. Therefore if you have not built and established a stellar credit history, you’ll want to work on that first. I always suggest starting off small when attempting to build new credit. This includes obtaining a small credit card or two that you can use to pay for expenses that you already have the funds to cover (e.g. gas or groceries). I suggest that you do it this way so that you are not tempted to spend what you don’t have to pay back. If you do it this way, you’ll be able to make timely payments and build your personal credit history and score over time. If you have less than perfect credit, the best thing for you to do is to begin rebuilding your credit history by paying off old debts and/or disputing old (and possibly inaccurate accounts). Whatever the case may be (good or bad personal credit), when you are ready to approach a lender to apply for a small business loan, your personal credit needs to be established and in tip top shape.
- Build Your Business Credit History – Building your business credit history and score in this day in age is a necessity. For example, if you plan on applying for an SBA 7(a) loan over $150k, lenders will check both your business and personal credit score. Your business and personal credit score will be combined to form what’s called a “LiquidCredit Score.” The “LiquidCredit Score” is the new business credit scoring model created by the Fair Isaac Corporation for lenders who want to determine if business owners are creditworthy. Business credit is becoming increasingly more important and cannot be ignored. In the early part of 2009, more than 45 million business credit reports were pulled from Dun & Bradstreet, and more than 35 million were pulled from Equifax Commercial, according to Creditera. Those numbers can’t be overlooked. As a startup business owner, you should immediately focus on building your business credit history and score so you can increase your chances of qualifying for a small business loan when you are ready to borrow. Attempting to borrow before you build your business credit history could result in a denial from banks and lenders (depending on what you are applying for).