Cash Flow Management – Should I Get A Loan To Fund Business Growth?
There are a lot of cash flow management points to consider when you are thinking about whether or not to get a loan to fund your business growth, especially if you are a small business. Taking on business debt is a serious proposition.
First, getting a loan to fund growth adds an interest expense and it creates another bill that has to be paid on a regular basis. Lenders will want assurance that they will be repaid, so they will look at several things:
1 – Does the business have assets that can be used as collateral to secure the loan?
The lender will want to see your current Balance Sheet and 2 or 3 years of tax returns to help answer this question.
2 – Does the business have enough cash flow to repay the loan?
The lender will want to see several years of Profit & Loss Statements and 2 or 3 years of tax returns to help answer this question.
3 – Is the anticipated growth that would be funded by the loan sustainable and profitable even with the increase in cash flow needed to repay the debt?
The lender will want you to have done your research to determine if the growth aligns with the long term strategies of the business. Market research can help the borrower determine the potential sales increases that are expected to be achieved, measured against what the additional cost of the growth may be in terms of equipment, building facilities and personnel.
The question the lender will be asking themselves when reviewing your financials and your business plan is “Will the increases in revenue be sufficient to cover the new costs plus provide cash flow to cover debt repayment and interest?
If the growth is being generated by a new large contract the company has won, the lender may be willing to use the signed contract as proof the borrower has the ability to repay the loan depending on the credit worthiness of the customer the signed contract is with.
4 – Does the planned area of growth make sense for the business considering the company’s long term strategy, the trends in its industry, and the current economic outlook.
Growth tactics can backfire and cause the failure of the business, so thorough research is necessary. In addition to several years of financial statements and tax returns, the lender will want to see the market research, usually presented in a well thought out business plan that includes a list of tangible assets the borrower can use to collateralize the loan. The lender will be looking for proof of sufficient cash flow and collateral to approve a loan. If the tangible assets of the company are insufficient, the lender will want to look at the personal assets of the borrower that can be used as collateral.
The business plan should include answers about the industry the borrower is in. Is the industry currently growing, stable or declining? What is the market outlook over the next one, three, and five years? Are new competitors entering the market, and if so, what plans does the borrower have to overcome the new competition? Are industry regulations changing, and what does the company need to do to about those changes?
If all of this seems overwhelming, there is high quality, no cost help available to you through SCORE (https://www.score.org) with their mentoring program. SCORE offers the nation’s largest, network of free, expert business mentors.
Borrowing money is assuming risk. It can make sense if the market potential is there to insure success. Solid market research and business cash flow management planning is imperative to reduce that risk and insure financial success.