Setting up in business is courageous. It’s also a calculated risk, and especially in the early years it will always need investment, especially during the growth phases. The funding usually comes from a bank or small business loans lender and with nearly 80 percent of small businesses failing in their first of operation it’s advisable to seek professional advice before signing on the dotted line of any loan agreement.
Even if you’ve got a profitable business, with reasonable working capital paying for large purchases without a loan is practically impossible for small business owners according to entrepreneur.com. However there is no reason to put off investing in the growth of your healthy business. All you need is the right advice and support from experts. Your accountant needs to be fully informed of your intentions and together with your loan advisor a financing plan can be put in place.
The size of the loan will vary depending on the size of your business, your years of operation, the health of your cash flow, and your business credit score. However, lenders do want to lend money, that is their business so don’t be put off by the paperwork required to secure the loan. Focus on why and when you borrow to grow your business. Here are five events that trigger the need for business owners to use a credit facility.
#1 Business Expansion
When the timing is right to move to the next level, you’ll want to take advantage of it so this is why business owners like to have funds available . As a small business owner, it takes capital and cash on hand to stay flexible in the competitive business environment. Many small businesses do not have on-demand access to funds and can fall into the trap of taking it from an operations budget which then leaves the business’s ability to deliver on it’s current commitments in jeopardy. In this case, a small business loan can cover the shortfall. Small business loans are usually approved quickly, with the cash available immediately after authorization.
#2 Support Cash Flow
As mentioned earlier the fail rate of small businesses in their first year of operation is extremely high. One of the biggest challenges for a small business is managing cash flow. If cash flow goes negative, it can mean the failure to deliver and the could also bring your business down. There are steps you can take to improve cash flow. It’s harder to manage debtors late payment of your invoices than it is to secure a loan to carry your business through. Even cash flow positive businesses have a contingency plan with loans and lines of credit.
#3 Manage Inventory
Managing inventory can be a nightmare scenario for new small businesses. Individual product lines sell out while others lag behind, this is the reality of business. However, if you are unprepared for this event, it can create a cash flow problem where your money is all tied up in one particular line of stock, and you need to replenish the items that sell well. Bridging this financial gap can be achieved with a small business loan that keeps your inventory moving without hurting your cash flow.
#4 Purchase Plant and Equipment
Every business relies on equipment. Whether its large milling machines that turn out engineering parts or a treadmill that your clients use every day, the expense of replacing or investing in equipment is usually impossible for a small business without the help of a loan. Handling an unexpected breakdown of your current equipment may also send your cash flow into negative territory, and a loan will help you over this temporary financial bump.
#5 To Leverage Another Larger Loan
As a small business or a start-up, you have no credit score to lean on. Therefore, procuring a small business loan first is a way to begin to build your company’s credit profile. After a few years of successful loan repayments, your credit score will be sufficient enough to apply with a financial institution, such as a big bank, for a larger loan to expand your company.
The most important part of securing a loan to grow your business is selecting the loan provider. Lean on your mentors and business advisors and partners to help you make the correct decision when choosing a credible financial services provider. Check references, their credentials and compliance with industry bodies. The lender should be registered with all the local and federal financial authorities and offer reasonable rates that are competitive in the lending environment.
There’s some good information on smallbusinessloans.co. Speaking to a loan consultant that will walk you through the loan application process and show you the options that are available to you is a great starting point. However always seek independent legal advice and remember to use the funds wisely.