Growing a small business has common rewards and challenges. A chance to expand reflects the budding success of your business. You begin to see how business growth can improve income and quality of life.
However, time and capital may restrict the potential for expansion. At this point, many small business owners consider financing to grow their companies.
Small business loans help companies break through plateaus and more easily capitalize on opportunities. Like most financial choices, some due diligence helps you make an informed decision.
So, how can small business owners borrow smart in 2014 and beyond?
Here are some timeless points to consider:
Understand the Time Value of Money:
The time value of money underpins inflation and other economic concepts. In basic terms, this principle says a dollar is more valuable today than in the future. Successful business decisions are often a function of time.
If a business lacks the capital to buy needed equipment or supplies, revenues and customer satisfaction will drop. No matter how delicious the food for a new restaurant is, diners will not likely return if orders take too long.
You should consider how delaying a purchase will affect revenues. The interest expense of an equipment loan may be easily offset by gains in productivity and profits. To make this decision, you should understand how debt differs from leverage.
Debt vs. Leverage:
How will the loan be used? The answers to this question help determine if you should borrow and loan structure.
Leverage uses money to realize direct benefits. Debt is often justified by multiple degrees of separation. Impulse purchases that do little to improve your bottom line are debt oriented.
For instance, you can leverage an installment loan for equipment that increases production to meet customer demand. A direct benefit is realized, as you no longer have to turn away buyers.
A business line of credit is leverage to meet payroll or buy supplies until receivables are paid.
What is debt or leverage will vary by the business. Using credit for new paint and fixtures may have little value for a company that does not work with the public. Meanwhile, a retail store that welcomes foot traffic may see direct benefits from an interior redesign.
Anticipate Borrowing Needs:
Recognizing signs that your business may need financing is crucial to effective borrowing. Your chances of loan approval and favorable terms can both be improved.
Lines of credit and business credit cards give you access to capital when needed, which uses the time value of money. Unlike a term loan, you will only pay interest if a balance is carried. You should consider opening a credit card or LOC in advance of needs.
By doing so, your financial statements will not reflect the need for credit. Better cash flow puts lenders at ease that your line of credit is leverage to improve the business. This may also result in lower interest rates.
There are also indicators that a term loan is needed. Applying for financing before crucial equipment wears out prevents down time and loss of revenue.
Business Loans are a Tool:
Loans help you grow a business in ways not otherwise possible. Since money is more valuable today than in the future, financing helps improve your cash flow for exponential gains. You should evaluate how and why the money will be used to make wise decisions.