December 23, 2017
How to finance your growing projects
Do you have large expansion plans for your small business, such as buying a new delivery truck, hiring a sales representative, or moving to larger offices?
Your projects will cost money; how will you finance them?
Many entrepreneurs make the mistake of financing their growth projects out of cash rather than through small business financing.
Pressure on cash
This can weigh heavily on your cash flow. Even if you currently have excellent profits and more than enough cash, what happens if an unforeseen hurdle depletes your income for a period of time?
If your money is locked in long-term assets , you could suddenly find yourself in need of cash.
It may be too late to contact a bank for emergency funds. Lending to a company with tight finances is a risk that bankers do not like to take. And the fact that you have not planned will not help.
Growing businesses: at risk
A surprising number of profitable businesses find themselves forced to close because of such circumstances.
The risk is particularly great for growing businesses, which tend to have higher accounts payable and receivables and larger amounts tied up in inventory and other assets. Earnings gains from increased business activity may be lower than the additional disbursements this entails.
The key, say the financial experts, is to harmonize the type of financing with the type of expenditure envisaged. Sources of liquidity, such as working capital or a line of credit, are suitable for short-term or recurring expenses such as utilities, office supplies or payroll.
Match the financing to the life of the asset
However, in the case of longer-term assets, it is often preferable to obtain a small business loan with terms of repayment that correspond to the expected life of the asset. For example, a delivery truck with a life of several years should be financed by a term loan of the same duration.
Other tips on financing:
- Establish your financing needs in advance. Plan your growth plans at the beginning of each year. You will be able to find your banker in advance (which indicates good management on your part) and negotiate the best possible conditions.
- When thinking about applying for a small business loan, do not just think about the interest rate. The conditions can be just as important. What will be the administrative costs? Can you initially defer capital repayments? What guarantees does the bank request? What is the amortization period? Flexible terms can free up more cash for your business.
- Having a financial planin hand will help persuade your bankers to give you a loan. Your plan should specify what the funds will be used for; when you will need it; and how you will repay them.