Small Business Loan
Signs your small business is ready for a loan
Small and mid-sized businesses often borrow money for no other reason than that they are in need of funds to support their operations. While the temporary need to borrow may simply be caused by a brief economic blip in markets, the need of immediate funding is not always a good reason to borrow. Small businesses owners are often required by lenders to guarantee amounts that they are borrowing and therefore borrowing when you are in economic need may be a poor business decision not only for the business but also for an owner’s personal finances. There are other reasons why a small or mid-sized business should borrow and signs that they are ready to borrow money under a long-term credit agreement, which will be the focus of this article. Another option to consider is factoring. Oilfield factoring and contraction factoring can be instrumental to a companies financial future.
The best reason that a small or mid-sized business should undertake a new credit agree should be related to the opportunities present in the market. If the cost of borrowing is less than the investment opportunity will yield it makes sense to borrow. While this general statement is true, understanding the different scenarios that can play out can be challenging. For example, a business may conclude that they can drum up a certain amount of return if they purchase a new piece of equipment that will allow them to expand their revenue base. While the calculation may be initially sound, a move by a competitor to purchase a similar piece of equipment can significantly impact the conclusion reached by the business. As such, it is important for a potential borrower to work out several different scenarios through a stress test that helps them to determine the potential viability of their offering. Repayment of the debt should be able to be generated from the return on the invested funds borrowed.
A small business should pay attention to the debt covenants included in the loan agreements that they are considering entering into. These debt covenants contain ratios under which the lender feels comfortable lending money to the business. Usually this is based upon a certain ratio of debt to earnings or operating cash flow. By testing the impact that the debt would have on past profitability and back testing the company the small business can see how well they could have repaid the debt in the past and by using budgets they can see how easily they can repay the debt in the future. The idea is to not be hamstrung by the terms of the debt agreement but rather to use the borrowed funds as an avenue to grow and expand your business.
Overall, as stated above, borrowing is all too often consummated because of the economic need to borrow to support the business as opposed to a desire to generate money to expand the business. While keeping the business afloat is of course desirable, debt can add to the burdens of a struggling business both in the short and long term and may not be the best course of action. Instead, a company should borrow when an opportunity presents itself that allows a business to grow and when the repayment of that debt will not be so burdensome to the business going forward.