PrintPositioning your business to maximize your company’s creditworthiness ahead of any financial need is ideal. This means watching your debt-to-income ratios and cash flow like a hawk. Make sure capital investments by principals are significant and regular to promote growth and prevent cash emergencies. Ensure that all bills are paid on time, vendor references are readily available, and financial statements are up-to-date. Itemize your assets and update their value frequently so you know how much collateral you have available at any moment. Meet regularly with your banker just to keep them abreast of your company’s progress. While you are in that meeting, ask about new banking tools that can help you leverage the profits you have now.
Knowing what type of financial tool you’ll need when the time comes to grow or improve efficiencies is important too.
First, check to see if it’s capital that you actually need or simply better cash flow management. Make sure, in other words, that the debt is critical for growth and not just a stopgap for cash flow troubles that can be better addressed through cash management strategies and tools.
Borrow because of expected business needs, not out of desperation to stay afloat. Desperate borrowing will only add to your burdens; debt is never a lifesaver, not for the company and not for the principals. But if your business is growing and needs capital to make the leap to the next stage, borrowing is a good tool to get you there. Just make sure you select the appropriate kind of debt for the issue at hand.
Short-term loans that generally reach maturity in a year or less are ideal for carrying you through seasonal slow periods. These usually consist of lines of credit, working capital loans, and accounts receivable loans.
Working capital lines of credit are typically used for day-to-day operations and generally mature in 90 days, although they can sometimes be extended for years. A revolving credit card can serve much the same purpose in some cases.
Long-term loans are better suited for major business expenses such as real estate, construction, vehicle, and equipment. These usually mature in one to seven years but are sometimes for longer periods if the expense is quite large. This category can include equipment leasing deals in lieu of an outright purchase. Letters of credit, especially to reduce risk in international trade by using the bank as an intermediary, are also an option both for short- and long-term needs.
However, qualifying for any of these loans requires preplanning. Obviously, a good credit report and payment history for both the company and its principals is a given. Having a viable business with solid cash flow is the “golden ticket” in terms of borrowing success. But a good business plan that has actually anticipated the need for capital is a big plus in your favor as well. Borrowing for planned growth, in other words, is smart, and banks are generally happy to see you have arrived at the next stage in your business.
Be sure your business plan includes clear direction as to what the borrowed money is actually needed for, and be prepared to detail those plans to your banker. Also be ready to reveal your plan for repaying the debt, and a backup plan as well.
