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Do I Need A Loan For My Business? 4 Ways To Know

By Margot Carmichael Lester, Staples® Contributing Writer

“Without a healthy cash flow, a business loses flexibility,” says Jacob Aune, co-owner of Altare Design, LLC, Aroma Park, IL. “Keeping a team working overtime on immediate projects to pay the bills removes focus from long-term goals. Customers are lost because advertising programs are canceled. Productivity drops because maintenance is put off for later. New products are stalled when funding and staff get pulled away. Being proactive about maintaining a healthy cash position means short-term cash needs never dominate decision making.”

By the time your cash position is bad enough, you may well have missed out on the best opportunities to convince lenders to give you a loan. Here are some better ways to know when to ask.

1. Growing pains. Fuel growth with an expansion/construction loan or acquisition financing.

Building your business requires funding to cover higher headcount, increased production capacity, new product development or even new offices or territories. “Multiple items can cause a cash crunch,” explains Wes Pope, senior vice president and commercial banking officer for First South Bank in Durham, NC. “If a physical product is involved, inventory may have to increase as well. Meanwhile, the business has to fund its expenses associated with the sales that generated the receivables and inventory growth.”

When the owners of Altare started out in 2012, they rented space to make custom church furnishings. But by the middle of 2014, they were ready to purchase property of their own. “We found the ideal building in July, got an investor on board and approached our bank for a loan,” Aune recalls. This enabled them to preserve operating cash. Learn more about loans for manufacturing and maker businesses.

2. Long-term needs. Preserve cash and credit lines with longer-term financing such as equipment or operating loans.

It’s a common mistake for small business owners to try to cover longer-term items with shorter-term capital. These scenarios include using lines of credit to temporarily fund permanent increases in receivables and inventory, and buying fixed assets like equipment or vehicles with available cash/liquidity. “Sooner or later, these mismatches will result in a cash problem,” Pope warns.

3. Short-term needs. Consider a working capital loan to cover short-term needs.

Jessica Mah, CEO and co-founder of inDinero.com, uses tracking and forecasting to make sure she has enough cash on hand for her accounting, tax and payroll solutions company in Walnut, CA. “I track the number of months of cash runway that we have, assuming conservative revenue forecasts and overly aggressive hiring plans,” Mah says. “I always want to have over a year of cash runway.”

Good monitoring like that is usually enough to avoid short-term funding gaps. But sometimes, despite your efforts, you need a quick jolt of cash. This can be especially true if your business is seasonal. Working capital loans can help you over a near-term hump like making payroll, covering accounts payable or managing an increase in accounts receivable from a spike in sales.

4. Advance planning. Get a loan or line of credit when your balance sheet looks terrific and business is good.

“The biggest mistake I've made is under-financing my business when times were good,” Mah admits. “I didn't set clear goals for how much money the company needed. This negatively impacted us in that we felt cash-strapped — and we felt the pressure of not having room to maneuver should we miss our goals. I've since remedied that by taking on more than 2 times the money that we actually ‘need.’ Our board has also helped us think through how much money we should have, and how we need to add in a lot of cushion to account for unforeseen costs and hires that we'd want to pay for.”

If any of these scenarios sounds familiar, it might be time to explore the right kind of loan funding. Whether you’re interested in sustaining your enterprise or growing it, there are many opportunities to secure debt funding to achieve your goals.

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