Finding Financing that Fits Your Business by Kevin Fox | Alerus | In Business Magazine

As published in the December 2019 Issue of In Business Magazine - Direct Link to the article - https://issuu.com/mediapublishersgroup/docs/inbusiness-december_final/38  

Kevin Fox | Senior Business Advisor | Alerus | [email protected] | 480.905.2419

Finding Financing that Fits Your Business

For smaller businesses, debt sometimes gets a bad rap. But for many businesses, access to a business line of credit may not only be necessary, but a smart move. Knowing how to select the right line of credit and manage it wisely can help a successful small business become a larger successful business than managing everything on a cash basis.

Financing options can be complex, however, so it’s worth taking the time to go through your cash and financing options with a business banker who can take the time to understand what you are trying to do.

• Cash Reserves – “The first line of defense”

Most people have heard the personal finance adage that they should have cash equal to 6 months of expenses on hand, in case they lose their job or have an emergency expense. But should businesses? And is it realistic or wise to have that much capital sitting around? 

The short answers: Yes, and yes. How much you need will depend a lot on your business and cash flow, so talk with a banker or business advisor who can draw on experience working with many businesses like yours. 

• Smooth out irregular business cycles and protect your capital with a line of credit

Many businesses have expenses and income on different cycles. Buying inventory weeks ahead of a shopping season, or raw materials that take months to turn into finished products you can sell are classic examples. Managing ebbs and flows by saving cash in rich times to spend later makes it hard to grow since you won’t have enough capital to expand significantly if the market is ripe. Lines of credit give you more flexibility than a credit card, often have better terms, and you can cover ongoing expenses with less stress.

With a line credit, you’re financing the gap between the placement of the order and the delivery of the product or service.

• Use term loans for capital expenses instead of paying cash

Buying a large-ticket item is stressful for smaller businesses. Purchases like major machinery or real estate can cost a lot, but they enable a company to make money over a long period of time and have an intrinsic value that improves a business’s balance sheet (and can be used to secure the loan). Saving up cash takes a long time and carries an opportunity cost. More importantly, term financing frees up cash to use for more productive purposes, like hiring people to run the machine or more inventory to sell at a store.

• Weigh the cost of financing against gains in efficiency

Think of purchases in terms of value to the business, not just price plus interest.  Some purchases are more valuable than others. If the monthly payment for one piece of equipment is twice as much as another, but triples productivity, that would be a good place to take on more financing – as long as there is a market for the increased output. Seizing such opportunities isn’t as risky as it might seem if you have a good business plan and a good lender who will help you validate these kinds of cost/benefit equations.

• Use financing to help manage changes in ownership

Succession planning helps businesses – and people. Many businesses delay or avoid talking about succession plans. They shouldn’t. In many companies, talk of succession planning may seem unnecessary or even “bad luck.” But planning what happens to your business not only ensures business continuity, it relieves families of the burden of sorting out ownership and is crucial for the well-being of employees and partners, too.

Buying, selling, and passing down a business are situations as unique as the people involved. An owner may want to take on a partner or sell to a buyer who doesn’t have the cash available. Or perhaps it’s time to set up an Employee Stock Ownership Plan (ESOP) so you can make the employees owners. In both cases, loans and payouts can be structured in lots of ways beyond a simple bank loan to make the opportunity attainable for all the parties involved.

Business owners shouldn’t expect to be experts in finance as well as running their own business. Financing options are more varied and specialized than many people might expect. If you’ve generally run your business on cash, credit card and simple charts of accounts, and you’re ready to take the next step, talk to a business advisor about the possibilities available to you.