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Does Your Business Really Need a Loan?

Business credit can be complicated and expensive, so before rushing out and taking thousands of dollars in business loans, consider whether your business really needs a loan. It is important to look at your business holistically and consider your cash flow, balance sheet, and other factors before applying for or accepting credit.

 

Can You Bootstrap?

Before you start racking up business debt, take a look in the mirror for your financing and decide if you can bootstrap the business. Many business owners fund business startup and growth costs out of pocket or keep to a very low “bootstrap” budget while starting out.

Using your own resources ensures you never owe a cent to creditors. Further, investing in your business yourself shows future lenders and investors that you are confident enough to stand behind your business. If you won’t put your own assets into your business, why do you think anyone else would? In many cases, the won’t. And even if they do, you are personally on the hook to pay back the loan in many cases. That’s why funding the business yourself is often the best option for new startups and ventures.

Float Your Needs with a Business Credit or Charge Card

Once your business earns some revenue, it is an easy next step to sign up for a business credit card or charge card. With charge cards, you can borrow throughout the month but have to pay the balance in full each month. With a credit card, you can carry your balance over from month to month, but have to pay expensive interest charges on the balance.

Credit and charge cards are a great option for very short-term funding. This can give you a month or two of wiggle room and flexibility to float your supply or inventory costs without going through a major loan or borrowing process.

Just be sure you can pay it off in a month or two or you will find yourself paying a lot for interest over time.

Better Manage Your Cash Flow

If your business is bringing cash in the door, your issues might be related to cash flow and management. In this case, borrowing will cause even bigger financial problems. Instead, focus on fixing the problem rather than the symptoms. Here are some common issues for new businesses:

  • Accounts Receivables – Do you have a lot of outstanding invoices? Work on improving your payment terms in customer contracts and shorten the due dates when sending invoices. Depending on your industry, there may be common terms businesses are used to paying, but you may be able to improve things on your own.
  • Expense Management – Some industries are capital intensive, while others give you the ability to run with just a laptop. Whatever your business, always have your eyes on your expenses to ensure you don’t drain profits from your bottom line.
  • Decrease Inventory – For businesses that sell products and stock inventory, keeping inventory on hand can be expensive. Moving towards just-in-time production or lowering stock on hand keeps your cash in the bank rather than tied up in product that’s getting dusty on a shelf.

These are just a few examples and each business is unique. Look at your own business for ideas to save money, lower overhead, and improve your cash crunch.

Save Up to Account for Lumpy Revenue

Some businesses are seasonal or see few, large transactions with long periods of no activity in between. If that describes your business, you should save up a bigger bank balance than companies that see a regular flow of cash into the business.

Saving up enough cash to easily cover slow periods or off seasons ensures you have enough funding to pay yourself, employees, and overhead costs without worrying about borrowing to cover a rough period.

Consider the Costs

Outside of friends and family, no one is going to give you money without expecting something in return. In the case of business loans, that something is interest. Loan origination and interest costs can be significant. For a new business without a long track record of success, borrowing money can come with interest rates over 20%. Before you take on new liabilities, look for options to fund your business from your own cash and operating revenues.

Getting into debt you can’t pay is the fastest route to bankruptcy and interest expense takes away from your profits, so always look at borrowing as the last option, not Plan A to keep your business afloat. If you can weather a rough season or two without borrowing, you are setting yourself up for long-term business success.

Does Your Business Really Need a Loan? was originally published on Due by Eric Rosenberg.

Author : John Rampton

John Rampton is an Entrepreneur, Writer, Full Time Computer Nerd, Founder at Due. Follow me on Twitter @johnrampton

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