Short-term and long-term growth is how most businesses stay afloat. For many businesses, if you’re not growing, you’re losing business. It’s unlikely a business will stay at the same threshold year after year.
There are some small businesses that grow organically from word-of-mouth, but for many businesses owners you’ll have to put some money behind getting new customers in your door and your revenue will cover those marketing expenses. For some businesses, opportunities for growth sometimes come knocking on your door and you may not have the cash flow to support a large investing. This is where some business owners will choose to finance their growth opportunities.
Ty Kiisel, our resident small business expert, has been working as a small business owner and small business advisor for over 30 years. We recently discussed which financial metrics a business owner should be on top of, and how those numbers can help you determine if financing a growth opportunity is a viable option for your business.
Ty, nor I, are advocates of borrowing without a plan. In fact, Ty always talks about how he believes borrowed capital should either increase ROI or add additional value to the business, or borrowing might not make sense (and I agree). It’s never a good idea for a business owner to borrow to get out of a hole, or to borrow to the sake of borrowing. You must be aware of the costs associated with borrowing and evaluate if your business will truly benefit from the funds.
Here are a few thoughts Ty shared with me that can not only help make borrowing profitable for your business growth, but how the right financing can assist future opportunities as well.
Be Strategic and Borrow with Purpose
It’s tempting to think that if you had just a bit more capital, all of your business trouble would disappear. Because of this temptation, there are some business owners who try to borrow funds to alleviate their financial troubles. In this situation, oftentimes, debt only makes your capital problems worse.
When you’re considering financing for your business, you want to make sure that you’re borrowing for the right reasons and that the debt will help your business grow, not weigh it down.
Ask Yourself: Why Am I Looking for Borrowed Capital?
If you answer this question before you begin looking for capital, you will put your business on the right track to get the best financing for business growth. Different loan purposes benefit from different types of financing from short-term to long-term, from term loans to lines of credit. The more you know about the type of loans that work best for your business need, the less time you’ll spend applying for financing that won’t help your business.
Ready Your Business for Financing
Many lenders will only lend to established businesses, including OnDeck (at least one year in business). So how does an early stage business, that needs borrowed capital to grow, prepare your business from day one?
Without a lot of revenue, a track record, or established business credit profile, there’s no way for a lender to accurately judge your business’ creditworthiness. During your first few years in business, you should think strategically about building your business credit.
- Establish trade relationships with vendors and suppliers: Even though this isn’t a loan, it will help establish your business’s creditworthiness. Make sure your suppliers report your credit history to the appropriate business credit bureaus. All of the major business credit bureaus consider these relationships when evaluating your business credit profile.
- Avoid using your personal credit for business purposes: You should not use a personal credit card for business purposes, Instead, use a business credit card when needed, make timely payments, and demonstrate your business’ ability to manage debt. Good payment history on a personal card or personal loan will not count toward your business credit profile.
- Start Small: Starting with a manageable short-term loan might not be the small business loan you need for large growth projects, but your good credit behavior will show future lenders that you can responsibly manage debt when the time comes for taking a larger, longer-term loan later on.
Is Financing Business Growth Really a Good Idea for My Business?
While financing isn’t the answer to every small business problem, it’s very possible that financing your business growth is the right decision for your business, as long as you take the right strategic approach. If you’re honest with yourself and clear about how you’ll use the funds and your ability to pay it back, borrowed capital could be the right growth tool for your business.