When is the best time to borrow money for your small business?

SCORE recently published an article in coordination with Ondeck, a SCORE business partner, that provides some excellent guidance on the timing of small business borrowing. Following are highlights of that article.

Small business owners face many challenges when they apply for loans, but sometimes, the biggest challenge is of their own making. If you wait until you urgently need financing to start looking for a lender, you’ve waited too long. The best time to borrow is when you have a strategic plan for the money and aren’t in critical need. Taking a thoughtful approach to seeking financing can make the loan process less stressful, enhance your chances of success, and ensure that you can pay back the loan with ease.

While it’s difficult to foresee every possible financing need over the next 12 or 24 months, taking a proactive approach to business planning generally can give you a fairly clear idea of what you may require. For example, do you expect to buy new equipment, add staff to meet demand, pivot operations or expand your business? All of these plans might be easier to accomplish with borrowed capital. Once you know what purpose the loan will serve, you can consider how much money you need and what kinds of loan terms will be best.

In today’s economy, lenders are becoming more cautious and putting more weight on a business owner’s cash flow, time in business and credit history. Advance planning gives you time to honestly assess your financial circumstances to determine if your business is likely to qualify for the loan you seek. Your current financial situation will directly impact the financing options you can access. Evaluating your situation realistically can help you zero in on the lenders who are most likely to approve your loan application. Many lenders will want direct access to your business bank accounts as proof that you can handle the payments.

After evaluating your business, if it doesn’t make sense to borrow, a strategic approach allows you to modify plans, postpone big initiatives or forego expansion in the short term in order to position your business for greater success a little further in the future.

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Sometimes disaster strikes without warning, and your business needs an infusion of funds to keep operating or get back on its feet. Ideally, you’ve planned for this possibility, too, by insuring your business against cybercrime, natural disasters and business interruption. Building an emergency fund will also help ensure catastrophes don’t take you by surprise.

If you haven’t taken these steps, however, you’ll be at a disadvantage when it comes to borrowing. Even in hard times, lenders’ key concern is your ability to make your loan payments. They want to see evidence that you have sufficient cash flow to repay the loan, plus a well-thought-out plan for using the loan proceeds. Will the money ultimately improve your business, or just keep it on life support until the inevitable happens?

Disasters can make financing harder to come by; in a crisis, when many business owners need money, getting a loan from your bank may take too long. If you can’t wait, online lending sites that match lenders with borrowers may be able to help you find the money you need. Just be sure you fully understand the loan terms and run the numbers to be sure that even in a worst-case sales scenario, you can manage the payments.

The most successful business owners look at financing in the same way they look at other business tools. Financing should never be used to metaphorically “roll the dice,” but rather as a way to make strategic investments that facilitate growth and increase business value.

— Rex Winter is a retired business executive from the agriculture industry, and a volunteer mentor with SCORE’s Tip of the Mitt chapter. Current and prospective small business operators can request SCORE’s free and confidential mentoring services by calling 231-347-4150 in the Petoskey area or 989-731-0287 in the Gaylord area.

This article originally appeared on The Petoskey News-Review: Rex Winter: When is the best time to borrow money for your business?