Taking the leap and applying for a small business loan can be scary. What if cash flow does not match your projections? Will borrowing really help you achieve your goals? Whether it is your first or your tenth loan, before you apply you want some reassurance that it is the right choice for your business.
While there is no 100% certain way to ensure success, you can learn from business owners who have borrowed before you. Learning about how they used a loan’s funds, and how it helped their business, can not only reassure you that you are on the right path but also show you how to grow through borrowing.
All businesses have their ups and downs and even a successful business can struggle managing their cash flow. It can be hard to get clients to pay on time, but rent is due or you need cash to order more inventory. Cash flow management refers to the practice of managing cash inflows and outflows so that you can cover expenses from sales.
This was the case for the owners of a tea shop in Maryland. Despite 15 successful years in business, unexpected changes to vendor payment terms left them struggling to buy new inventory. If they could not restock their tea selection, they could not stay open. Taking out a small business loan from an alternative lender saw them through a rough patch until they could adjust to the new payment terms.
Seasonal businesses with fixed overhead can also benefit from a small business loan. In another example, a wine tour and wedding transportation company needed to pay a general liability deposit on their buses during their slow months. Unable to cover the expense when cash flow had slumped, they turned to a small business lender. A loan helped them manage their cash flow and cover the expense until the busy season.
Cash flow management is a skill that every small business owner must learn, and this includes knowing when to borrow.
Consolidate Higher-Interest DebtIn the beginning, you might have borrowed from anyone to get your business off the ground. It is not uncommon for entrepreneurs to use credit cards to fund a launch or the first few years in operation. With no business history and perhaps a lower credit score, you might have paid a hefty price tag for that debt. Also possible is taking a business loan from a lender that overcharged on rates and terms. These scenarios are quite common and can have any business owner in a position to consolidate their loans into one with better rates and terms.
One of the best uses of a small business loan is to consolidate higher-interest debt. Even a loan at 15% interest would be cheaper than the average credit card rate or some first time merchant cash advances that can come with very high interest rates because of a lack of borrowing history. If you have several outstanding business loans or credit card balances, calculate your blended rate. The blended rate is the amount you are paying for all that capital when taking into account the different balances and interest rates.
Many small business owners have found that they can save hundreds, if not thousands of dollars in interest charges by taking out one business loan to pay off all their different forms of credit.
If your business plan includes growing by adding locations or product lines, it is almost a guarantee that you will have to borrow. Renting another space, paying for a remodel, or purchasing the materials to develop new products all requires significant capital upfront. It could be months or years before the investment generates revenue and eventually pays for itself.
In another real life example the founders of a light & electrical co. meant to grow slowly and self-fund their growth. But when orders started flooding in, they knew they had to seize the opportunity. Before they could say “yes” and accept all the orders, however, they needed capital. Often, you must buy supplies and order inventory to support growth, but your existing sales have not generated enough cash on-hand to fund those orders. This company took out a business loan and used it to cover the gap between receiving all those orders and being paid for them.
Another way for a business to expand is to offer new products. After nine years selling cupcakes out of a Brooklyn Cupcake shop two women knew they need to expand their product offerings to grow. But financing was tough. They worked with an agency to help them pull together the paperwork to apply at a bank. It took 30 days just to assemble the documentation only for their bank to deny them financing.
When they applied with an alternative lender they received the money to expand that they needed to develop banana puddings and special flans for sale, as well as add delivery through multiple apps. Their business would have stagnated without a capital investment.
Whatever expansion looks like for you, taking out a loan can be the best way to fulfill that dream.
Marketing activities help you reach your target customers and let them know how your goods and services can meet their needs. It generates sales and increases awareness. While it will produce more sales, you often must invest in marketing materials prior to seeing their results.
In one particular example, a large consignment store in Florida, sales started to slow down in the summer. The owner, like with many seasonally strong businesses has to wait for the snowbirds to come south for his busy season to kick off. But he has to buy ads and invest in marketing materials in advance of their arrival. Applying for a small business loan with an alternative lender helped him fund a marketing campaign that was ready when his customers arrived.
Marketing campaigns can also be just as important for non-seasonal businesses. A great example can be found with a custom cabinetry company that had hired two salespeople but still was not seeing the sales growth expected. Deciding to increase marketing efforts to make the company work the owner in this case applied online for a business line of credit. It paid off handsomely. Increasing his marketing spend by 50% resulted in a 25% increase in leads and a 30% increase in sales.
In both cases, a business loan’s funds paid for marketing that produced growth and success.
In some industries, it is common to wait several months for payment. In a recent business loan contract a Construction company had an average of 120 days between completing a job and receiving payment. Work done for builders of new housing developments often see this, they had been pouring concrete for curbs and sidewalks for a period of time even when the builder had not been paid yet. If the owner did not cover payroll on Friday and every Friday, workers would not show up on Monday.
This owner knew he needed capital to help with payroll management, but banks gave him the runaround. High interest rates, additional requests after the initial application, and long approval times led him to apply with an online lender. After a quick and easy application and approval process, he had the funds he needed to keep his workers paid.
Your employees are your biggest asset. If they leave they take with them their expertise and in-depth knowledge of your business, as well as possibly customers who might follow them. As well, if they spread the word that you do not pay on time, it could be difficult to attract talent in the future. It is worth taking out a loan to help with payroll management.
When the owners of a Barbershop in Utah decided to open another location in another state, they needed to hire more staff. Managing two locations so far apart necessitated traveling back and forth as well. Since they could not cover as many hours in their original store, they needed to hire, but money was tight after opening the new location. Taking out a business loan for inventory was the perfect solution for this couple
Purchase EquipmentIf your business depends upon equipment to produce goods or perform services, it could be impossible to expand without purchasing more equipment. You cannot take on large catering orders without enough commercial ovens to fulfill them, or sign a new manufacturing client if your production line is already at capacity. Equipment also wears out, and must be replaced to support existing business.
Another great example can be found with the owner of a Maintenance and Auto Care company, one that primarily services auto fleets for commercial customers. Because the owner has to buy parts and supplies in advance, cash flow management had been an issue. And, after a few years in business, he needed to upgrade the equipment in his garage as well as invest in a wheel-alignment system.
While he could have taken out an equipment financing loan, it would only fund the equipment and not other, smaller needs related to the new equipment. A general business loan from an online lender gave him more flexibility.
As an alternative lender, Shield Funding believes in the power of lending. Over ten years of lending has shown us the success that small business owners can achieve when supported by a reputable lender. If you have been thinking of borrowing for your small business, contact us today.
