First you will want to speak with a knowledgeable bank partner on what option are available to you.
Traditional Loans – A funding option generally applied for through your bank where you receive a specific amount of money, to pay back over a specific term for a specific business reason.
SBA Loans – The Small Business Association is a US government agency that can offer funding options up to $5 million dollars to small businesses. These types of loans fill gaps (for startups and disaster relief) in a banks traditional lending program because it is partially guaranteed by the US government.
Factoring Loans – Basically an option where you can “sell” your Accounts Receivable (what your clients owe you) for a cash advance. The company either collect when your clients pay the outstanding invoices, or you must pay daily amounts until the advance plus interest is paid off. Companies such as Bluevine & Fundbox offer these alternative options, but many times for a less than ideal rate and term.
1. Prove an ROI Loans can be a double-edged sword, deceivingly making unaffordable items seem affordable. To ensure it is a good use of funds, as yourself two questions.
What is the monthly Return on Investment (ROI) this purchase will bring the organization (whether expanding or replacing the old)? Examples:
- Buying equipment that cost 1k a month, but saves needing an 18k repair in the next year (1.5k avg. cost).
- Purchasing the building will lower my monthly 10k in rent to a 9k mortgage payment.
- A loan for a new location will cost 2k a month, but will bring an additional 5k in monthly profit.
How confident are you in the ROI calculation? Ask yourself, are you willing to bet your house on it (because they may just ask you to)?
2. Request a Specific Amount Be wary of requesting too much money. Let’s say you are buying a building. Receiving additional money to cover potential expenses you may incur may sound like a great idea. The issues are that having additional money drives the behavior to spend more money, and purchases are now bought on premium (add interest) and even if the money isn’t spent there is a cost (interest again).
Don’t under fund. Underfunding a business venture is one of the top reasons for business failure. It is also very hard to go back to the well again and ask for more money (underwriters hate it).
3. Term of Loan < Useful Life If buying an item (equipment, car, building, software) it is important to know how long it will be usable and more importantly how long it will be providing you value. We call this it’s useful life.
Ideally, we do not want to over commit ourselves to having to pay off something that we don’t use anymore. (outdated, broken, out of warranty, etc.)
TAKE ACTION TODAY!
Can you prove a monthly ROI for the last large purchase the business made? Try proving one for an upcoming purchase you are thinking of making.
Still unsure what to do next? Call Accounted4 at 215-801-3365 or send us a message! We are happy to help you calculate a ROI and provide a complimentary consultation to outline your first steps.
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