August 4, 2020

Lessons Learned Series: Getting a Bank Loan

This year marks the 30th anniversary of SRB Communications. In honor of this accomplishment our blog series, Lessons Learned, will highlight five key lessons that founder and CEO Dr. Sheila Brooks learned during 30 years in business. Each week the blog will offer a new lesson and new advice. This week we offer Lesson #2 – Getting A Bank Loan.  If you missed Lesson #1 – Pivot the Business, here’s the link.

Access to capital is critical for starting and growing a small business, but many people don’t realize that the need extends beyond the first few years. If your goal is to expand your business, obtaining a bank loan or line of credit could help you invest further invest in your company and push you towards your growth goals. Here’s what you need to know:

  • It’s important that business owners have access to capital, especially for unforeseen circumstances.
  • It’s also important that your business credit and personal credit are in good shape.
  • The main difference between a loan and a line of credit is how you get the money and how and what you repay. A loan is a lump sum of money that is repaid over a fixed term with interest.  A line of credit is a revolving account that allows borrowers to draw, repay and redraw from available funds.
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Obtaining a line of credit or bank loan is an investment in your business. Know exactly what purchases you plan to make with that loan and how it will help increase profitability. Do not get a bank loan unless you have a clear plan of how that money will be used to further your business and how you’ll pay it off.

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The best advice I can give you is to get a loan or line of credit when you don’t need the money. I’ve learned this from my own experience as a business owner. After my fifth year in business, I decided it was time for me to invest in editing equipment and an audio recording studio.

Although I got a loan to do that, I didn’t need the money. But I knew that by investing in the editing equipment and audio recording studio I would keep a large percentage of business in-house that I had been outsourcing. And I also knew I wanted to grow my business.

At that time in 1995, I had contracts with the federal government for about five years, had received our 8(a) certification and was positioned to win some other bigger government contracts. Acquiring this equipment would bring much of my editing production in-house and allow for more profits on those contracts. So, I got the loan a 5-year loan and paid it off in 2½ half years. The 8(a) program is a federal government 9-year business development program for small, disadvantaged businesses. We successfully completed that program in 2003.

In business it is imperative that you go after capital tirelessly. You must be able to build banking relationships. And, most importantly, you’ll need good credit. As a small business owner, you have to pull those credit reports, see where you stand and work to bring your credit scores up – both business and personal. If you fund your business on credit, you’ll have to make sure that you are paying those bills on time every month.

Our current economy provides a grave example of why it is important to have access to capital. Once the global health pandemic hit, corporations, governments and small businesses were forced to downsize with layoffs, furloughs and pay cuts. Many rushed to banks to request more money – without success. It isn’t just small businesses; big businesses are struggling with access to capital, too. This pandemic is teaching us a great deal about the U.S. economy.

 So, it’s important to remember that bank loans and lines of credit require a great deal of responsibility. They can be great tools to help your business grow, but do not to misuse them. The result could be disastrous to both you and your business.