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Does your small business need funding? If you confidently (and quickly) answer, “No,” you might be making a mistake that could hurt your company’s chances for growth. Here are three situations where you might need financing for your business:
1. Urgent situations. “Perhaps you own a restaurant and your oven breaks, or you own a shipping company and one of your trucks breaks down,” says Andres Moran, Cofounder & Head of Business Development at Fundera. “Or something mission-critical to your business needs repair or replacing.” Urgent situations aren’t always crises; sometimes they can be positive as well. “Maybe you got a big purchase order from Walmart for half a million units,” Moran says. In these cases, you need purchase order financing—pronto.
Paying off past-due invoices may seem like an urgent situation needing financing, but Moran cautions that’s it’s not. “Unpaid invoices are essentially a loan in themselves,” he explains. “Don’t pay those off with a loan; instead, have open communication with your vendors, tell them the situation and work something out with them. Otherwise, you’re borrowing from Peter to pay Paul.”
2. “Nice-to-have” situations. Do you have an opportunity for growth in which financing could help? “Maybe a supplier offers you a discount on a bulk purchase, but you need more capital to [pay for it],” Moran says. Or you might want to expand into a second location or a bigger office space, hire new staff to take advantage of growing demand, or expand a successful marketing campaign to a wider scale.
If you don’t obtain financing for such situations, “it’s going to take you a lot longer to grow your business, and create a lot more stress and burnout that’s completely unnecessary,” says Moran. “If your business is doing fairly well and obtaining some capital can enable you to ‘step on the gas,’ you should do it.”
What you shouldn’t do: use a small business loan for something that’s not an investment. “Spend loan proceeds only on assets that are going to generate revenue, such as inventory, equipment or a new location,” Moran advises. “Don’t use a loan to pay yourself a salary or make minor aesthetic improvements to your place of business.”
3. Proactive situations. “If you’re being really prudent, ideally you want three to six months’ worth of working capital in your bank account,” Moran explains. Macroeconomic events can affect your business, regardless of how well you plan. “If you don’t have those capital reserves on hand, it’s not a bad idea to take out a loan.”
However, Moran emphasizes, “you don’t want to be repaying that loan in a year. Look for a five- to 10-year loan. It’s important to match the use of the capital to the time period in which [you] need to repay it.”
Make It Work
Whatever your situation, how can you ensure you obtain the capital you need? Like a Boy Scout, be prepared. “Make sure your books are in order, you’re up to date on taxes, your credit score is good and you’re not falling behind on payments,” says Moran. “These are the high-level, basic things that lenders will want to see.”
In addition, you can provide your business some cushion against unforeseen events—or some unexpected opportunities—by having a business line of credit. “It’s always smart to seek capital when you can get it, and it’s very wise for a business to have a line of credit available to them if they’re able to obtain it,” says Moran. “Other than some nominal annual fees, there really isn’t a risk to it.”