When is timing right for a business loan?
- August 23, 2009 - 5:45 PM
Q I am an online retail Mompreneur. My business is small but steady, with great possibilities of growth. I've never taken a business loan to expand my business and would like to know how to gauge if it's a good idea, and how to know when the timing is right.
Old World Limited
A Obtaining a small-business loan to expand your business can be a good idea, but it wouldn't be the first place I would look for financing. I would try to avoid debt if reasonably possible. When you obtain a bank loan for your business, you are taking on added fixed monthly interest and principal payments. If business takes a downturn, these added costs could drive you out of business and affect your personal financial life, too.
My preferred source of funds is internally generated cash.
If your business is steady and profitable, I would reinvest that money into the business to grow modestly over time.
Another source of financing for your retail business may be from your suppliers. If you need to increase your inventory to support your growth, make sure you are getting the most favorable credit terms from your suppliers. By giving you 10, 15 or even 30 days to pay, suppliers act like a short-term lender.
If neither of those options will do the trick, and you need to invest in inventory or revenue-producing equipment, a bank loan may be the way to go. You will then need to demonstrate to the lender that your business has the cash flow to cover the interest and principal payments.
If the purpose of the loan is to cover business losses or to catch up on overdue bills, it is unlikely that you will find a willing lender. In such a case, I would confer with your CPA or other trusted advisers to evaluate the long-term viability of your business.
Director, Small Business
Opus School of Business
University of St. Thomas
© 2014 Star Tribune