When it comes to financing there is a lot of things we need to contemplate, particularly for small and medium-sized businesses. Most business owners and companies use financing as a way to keep their company from falling into bankruptcy. I wanted to share some principles that can help you use financing in a better way rather than as a last resort.
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Never leave it for last:
Think of financing as going to the GP, most of us just do it when we are sick already but really we should be doing regular check-ups to keep track of our health and to have a proactive approach to it. Financing is no different when you look for loans, credits and financing you have to do it proactively rather than when you already have a cashflow shortage. Being proactive will consequently lead to the credit being approved and your business being able to run smoothly.
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Never use credit to pay credit:
this is a very important point that more often than not people forget, credit or loans are not meant to be used to pay other credit or loans. The reasons are pretty straightforward, you will incur double the interest to just keep your head above water, you will have two debt commitments instead of one, you will increase monthly repayments, the list goes on… Simply speaking you are better off calling the bank or financier for the original commitment and arrange a couple of weeks of grace or a new repayment schedule.
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Why Financing is not like throwing a hail mary:
Financing is not about luck and it is not something to be used when you know your business is not going to succeed. Financing is not an option to substitute bankruptcy, it is a way for you to access cash to grow, not to keep the lights on for another month. There is a big difference and sometimes we forget it. Debt and credit commitments will actually push you from “Close to bankruptcy” to “Bankrupt” really quick, so before thinking of using financing as a last resort you need to understand and analyze your position to a full extent.
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Do not make commitments based on projections:
a lot of us at one point or another have fallen to this, we have taken debt and credit based on revenue projections that might or might not actually materialize. I.E “I have been working on this deal for months, I am sure he will come through, let’s take a 15K loan and the deal revenue will be used to repay the loan”, this is exactly what causes a lot of companies to be in debt and struggle to pay back. You have to make sure that before you take any commitment you have a plan to repay it and that plan should be a very solid one, not based on your sales pipeline or promises from your salesforce.
These points should allow you to understand financing a bit more, when and how to use it. As business owners sometimes we search for any way to keep our business running, although cash is a great way to do so, accessing it through financing might not be the most suitable way. In order to see if it is or not do a solid forecast and analyze your financial position, this should enable you to see whether you can repay the loan or not.
If you have any questions related to finance or your business performance we are here to help!