3 Times to Take on Debt for Your Business
Everybody has heard the stories of business financing gone wrong. Taking out lots of money on an idea that hasn’t been fully thought out. Paying for one loan by taking out another, and getting caught in a cycle of debt—not that small businesses have exclusive ownership on that mistake.
But just because there are some times when you should not be taking out a loan or other form of financing doesn’t mean there is never a time you should. It’s all about thinking things through in advance, and using money for the right things, at the right times. Here are three times when going to a lender for your small business might work:
Funding Expansion
The best type of debt is one that pays for itself. Expanding your business, whether by adding a new product or service, moving into a new area, or simply increasing your own capabilities with a new facility, takes money upfront, with expected gains over the long term. When you don’t have the cash on hand, if you fund the expansion with a loan or line of credit you can use the extra profits from expansion to pay off the debt. If you’ve correctly planned the expansion and correctly estimated the increase to your revenue, you can get into a virtuous cycle of one debt paying for itself, rather than the vicious cycle of new debt paying for old debt.
Predictable Cash Flow Valleys
Your business makes a certain amount of money over the course of a year. But that revenue doesn’t necessarily all come in at a steady pace, the same amount each quarter, month, or week. Many businesses have somewhat predictable peaks and valleys in their cash flow, whether it’s a business that is explicitly seasonal, has long payment terms, or generates revenue from sporadic big-ticket sales rather than a steady flow of smaller deals. Taking out a business loan or line of credit can help smooth out the roller coaster ride, bringing in money during the valleys, with extra revenue from the peaks paying off the debt. That also helps you keep going in the event that one of those valleys goes on a little longer than you expected. Just be sure to set your spending (and lending) at a level that you know you will be able to afford. Set it too high and even the good times won’t be enough to pay off the debt.
Hiring
Hiring new employees can be expensive. In addition to paying additional salary or wages, in the early going you also have to anticipate the cost of training a new hire and getting them up to speed, in both time and money. That salesman you hired might eventually bring in a lot of revenue, but it probably won’t happen on day one. Finding a lender is one solution to filling in the gap between the initial hire and the time when the employee begins generating substantial revenue for the business. You don’t want your business to hit a point of stagnation where you can’t afford to hire because of the upfront costs, but are unable to grow without hiring. By finding the right kind of funding solution, you can break through the gridlock.
Conclusion
Business funding can be scary (if you’ve ever taken out a mortgage, it may hit you sometime around the 37th signature), but in the right situation it can be the right move. The most important thing is to have a plan for what you’re going to use the money for. Plan in advance so you have an accurate estimate of how much debt you can afford and how much extra revenue you can generate. The last thing you need is to find yourself flush with cash, and with no idea what to do with it—because the only guarantee then is that you’ll use it poorly. Never take on debt rashly. Look for ways that you can put your money to work for you, and get your financing to pay for itself and help your business run more smoothly.
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